Mativ Holdings, Inc. - Quarter Report: 2010 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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For
the quarterly period ended September 30, 2010
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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For
the transition period from __________________to __________________
1-13948
(Commission
file number)
SCHWEITZER-MAUDUIT
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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62-1612879
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(State or other
jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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100
North Point Center East, Suite 600
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Alpharetta,
Georgia
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30022
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(Address
of principal executive offices)
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(Zip
code)
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1-800-514-0186
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (Check one):
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Smaller
reporting company o
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(Do
not check if a smaller reporting
company)
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||||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
There
were 18,019,049 shares of common stock, par value $0.10 per share, of the
registrant outstanding as of October 29, 2010.
TABLE
OF CONTENTS
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Page
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Part
I
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements
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1
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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31
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Item
4.
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Controls
and Procedures
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31
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Part
II
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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32
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Item
1A.
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Risk
Factors
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33
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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33
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Item
3.
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Defaults
Upon Senior Securities
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33
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Item
5.
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Other
Information
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33
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Item
6.
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Exhibits
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33
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SIGNATURES
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34
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GLOSSARY
OF TERMS
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INDEX
TO EXHIBITS
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EX
31.1
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Section
302 Certification of CEO
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EX
31.2
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Section
302 Certification of CFO
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EX
32
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Section
906 Certification of CEO and CFO*
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* These
Section 906 certifications are not being incorporated by reference into
the Form 10-Q filing or otherwise deemed to be filed with the Securities
and Exchange
Commission.
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PART
I
ITEM
1. FINANCIAL STATEMENTS
SCHWEITZER-MAUDUIT
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(dollars
in millions, except per share amounts)
(Unaudited)
|
Three Months Ended
|
Nine Months Ended
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|||||||||||||||
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September 30,
2010
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September 30,
2009
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September 30,
2010
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September 30,
2009
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|||||||||||||
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Net
Sales
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$ | 182.0 | $ | 182.0 | $ | 557.4 | $ | 531.7 | ||||||||
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Cost
of products sold
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132.5 | 127.0 | 409.1 | 388.9 | ||||||||||||
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Gross
Profit
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49.5 | 55.0 | 148.3 | 142.8 | ||||||||||||
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Selling
expense
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4.5 | 4.3 | 14.3 | 14.0 | ||||||||||||
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Research
expense
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2.1 | 1.9 | 6.2 | 5.9 | ||||||||||||
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General
expense
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11.5 | 11.0 | 33.9 | 33.3 | ||||||||||||
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Total
nonmanufacturing expenses
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18.1 | 17.2 | 54.4 | 53.2 | ||||||||||||
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Restructuring
and impairment expense
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0.7 | 18.5 | 7.2 | 19.6 | ||||||||||||
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Operating
Profit
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30.7 | 19.3 | 86.7 | 70.0 | ||||||||||||
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Interest
expense
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0.4 | 0.8 | 1.4 | 3.7 | ||||||||||||
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Other
income (expense), net
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0.8 | 0.1 | (0.5 | ) | (0.3 | ) | ||||||||||
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Income
from Continuing Operations before Income Taxes and Income (Loss) from
Equity Affiliates
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31.1 | 18.6 | 84.8 | 66.0 | ||||||||||||
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Provision
for income taxes
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10.7 | 6.5 | 30.1 | 20.5 | ||||||||||||
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Income
(loss) from equity affiliates
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0.8 | 1.0 | 2.1 | (1.4 | ) | |||||||||||
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Income
from Continuing Operations
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21.2 | 13.1 | 56.8 | $ | 44.1 | |||||||||||
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Loss
from Discontinued Operations
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(3.0 | ) | (8.6 | ) | (5.2 | ) | (19.2 | ) | ||||||||
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Net
Income
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$ | 18.2 | $ | 4.5 | $ | 51.6 | $ | 24.9 | ||||||||
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Net
Income per Share - Basic:
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||||||||||||||||
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Income
per share from continuing operations
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$ | 1.16 | $ | 0.85 | $ | 3.12 | $ | 2.87 | ||||||||
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Loss
per share from discontinued operations
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(0.16 | ) | (0.56 | ) | (0.28 | ) | (1.25 | ) | ||||||||
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Net
income per share – basic
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$ | 1.00 | $ | 0.29 | $ | 2.84 | $ | 1.62 | ||||||||
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Net
Income per Share – Diluted:
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||||||||||||||||
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Income
per share from continuing operations
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$ | 1.14 | $ | 0.80 | $ | 3.06 | $ | 2.81 | ||||||||
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Loss
per share from discontinued operations
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(0.16 | ) | (0.53 | ) | (0.28 | ) | (1.22 | ) | ||||||||
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Net
income per share – diluted
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$ | 0.98 | $ | 0.27 | $ | 2.78 | $ | 1.59 | ||||||||
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Cash
Dividends Declared Per Share
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$ | 0.15 | $ | 0.15 | $ | 0.45 | $ | 0.45 | ||||||||
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Weighted
Average Shares Outstanding:
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||||||||||||||||
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Basic
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17,641,000 | 15,313,000 | 17,755,100 | 15,196,500 | ||||||||||||
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Diluted
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18,007,200 | 15,906,900 | 18,101,900 | 15,502,400 | ||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
1
SCHWEITZER-MAUDUIT
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(dollars
in millions, except per share amounts)
|
September 30,
2010
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December 31,
2009
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|||||||
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(Unaudited)
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||||||||
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ASSETS
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||||||||
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Current
Assets
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||||||||
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Cash
and cash equivalents
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$ | 80.7 | $ | 56.9 | ||||
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Accounts
receivable
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97.7 | 85.8 | ||||||
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Inventories
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107.2 | 127.3 | ||||||
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Income
taxes receivable
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4.3 | 23.4 | ||||||
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Other
current assets
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13.2 | 6.3 | ||||||
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Total
Current Assets
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303.1 | 299.7 | ||||||
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Property,
Plant and Equipment, net
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407.7 | 401.1 | ||||||
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Deferred
Income Tax Benefits
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11.6 | 17.3 | ||||||
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Investment
in Equity Affiliates
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19.1 | 16.6 | ||||||
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Goodwill
and Intangible Assets
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12.2 | 14.1 | ||||||
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Other
Assets
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56.8 | 43.1 | ||||||
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Total
Assets
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$ | 810.5 | $ | 791.9 | ||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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||||||||
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Current
Liabilities
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||||||||
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Current
debt
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$ | 8.6 | $ | 17.7 | ||||
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Accounts
payable
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50.4 | 46.7 | ||||||
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Accrued
expenses
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99.0 | 115.5 | ||||||
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Current
deferred revenue
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6.0 | 6.0 | ||||||
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Total
Current Liabilities
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164.0 | 185.9 | ||||||
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Long-Term
Debt
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44.0 | 42.4 | ||||||
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Pension
and Other Postretirement Benefits
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36.5 | 38.4 | ||||||
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Deferred
Income Tax Liabilities
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27.3 | 14.2 | ||||||
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Deferred
Revenue
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1.2 | 7.2 | ||||||
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Other
Liabilities
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20.5 | 21.6 | ||||||
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Total
Liabilities
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293.5 | 309.7 | ||||||
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Stockholders’
Equity:
|
||||||||
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Preferred
stock, $0.10 par value; 10,000,000 shares authorized; none issued or
outstanding
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— | — | ||||||
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Common
stock, $0.10 par value; 100,000,000 shares authorized; 18,699,140 and
18,633,235 shares issued at September 30, 2010 and December 31, 2009,
respectively; 18,005,569 and 17,874,885 shares outstanding at September
30, 2010 and December 31, 2009, respectively
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1.9 | 1.9 | ||||||
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Additional
paid-in-capital
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205.7 | 205.7 | ||||||
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Common
stock in treasury, at cost, 693,571 and 758,350 shares at September 30,
2010 and December 31, 2009, respectively
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(24.4 | ) | (14.0 | ) | ||||
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Retained
earnings
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325.4 | 281.9 | ||||||
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Accumulated
other comprehensive income, net of tax
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8.4 | 6.7 | ||||||
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Total
Stockholders’ Equity
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517.0 | 482.2 | ||||||
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Total
Liabilities and Stockholders’ Equity
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$ | 810.5 | $ | 791.9 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
2
SCHWEITZER-MAUDUIT
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(dollars
in millions, except per share amounts)
(Unaudited)
|
Common Stock Issued
|
Treasury Stock
|
|||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid-In
Capital
|
Shares
|
Amount
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Retained
Earnings
|
Accumulated
Other
Comprehensive
Income (Loss)
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Total
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|||||||||||||||||||||||||
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Balance, December 31, 2008
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16,078,733 | $ | 1.6 | $ | 64.6 | 748,953 | $ | (14.1 | ) | $ | 255.9 | $ | (30.6 | ) | $ | 277.4 | ||||||||||||||||
|
Net
income for the nine months ended September 30, 2009
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24.9 | 24.9 | ||||||||||||||||||||||||||||||
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Adjustments
to unrealized foreign currency translation, net of tax
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25.1 | 25.1 | ||||||||||||||||||||||||||||||
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Changes
in fair value of derivative instruments, net of tax
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6.7 | 6.7 | ||||||||||||||||||||||||||||||
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Amortization
of postretirement benefit plans’ costs, net of tax
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1.9 | 1.9 | ||||||||||||||||||||||||||||||
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Comprehensive
income, net of tax
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58.6 | |||||||||||||||||||||||||||||||
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Dividends
declared ($0.45 per share)
|
(6.9 | ) | (6.9 | ) | ||||||||||||||||||||||||||||
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Restricted
stock issuances, net
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(0.3 | ) | (13,500 | ) | 0.3 | — | ||||||||||||||||||||||||||
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Stock-based
employee compensation expense
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5.3 | 5.3 | ||||||||||||||||||||||||||||||
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Tax
effect of stock-based employee compensation expense
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1.0 | 1.0 | ||||||||||||||||||||||||||||||
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Stock
issued to directors as compensation
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242 | — | — | (3,306 | ) | — | — | |||||||||||||||||||||||||
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Issuance
of shares for options exercised
|
304,768 | — | 8.3 | (30,750 | ) | 0.6 | 8.9 | |||||||||||||||||||||||||
|
Purchases
of treasury stock
|
— | — | — | 56,953 | (0.8 | ) | — | — | (0.8 | ) | ||||||||||||||||||||||
|
Balance,
September 30, 2009
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16,383,743 | $ | 1.6 | $ | 78.9 | 758,350 | $ | (14.0 | ) | $ | 273.9 | $ | 3.1 | $ | 343.5 | |||||||||||||||||
|
Balance,
December 31, 2009
|
18,633,235 | $ | 1.9 | $ | 205.7 | 758,350 | $ | (14.0 | ) | $ | 281.9 | $ | 6.7 | $ | 482.2 | |||||||||||||||||
|
Net
income for the nine months ended September 30, 2010
|
51.6 | 51.6 | ||||||||||||||||||||||||||||||
|
Adjustments
to unrealized foreign currency translation, net of tax
|
1.1 | 1.1 | ||||||||||||||||||||||||||||||
|
Changes
in fair value of derivative instruments, net of tax
|
(1.1 | ) | (1.1 | ) | ||||||||||||||||||||||||||||
|
Amortization
of postretirement benefit plans’ costs, net of tax
|
1.7 | 1.7 | ||||||||||||||||||||||||||||||
|
Comprehensive
income, net of tax
|
53.3 | |||||||||||||||||||||||||||||||
|
Dividends
declared ($0.45 per share)
|
(8.1 | ) | (8.1 | ) | ||||||||||||||||||||||||||||
|
Restricted
stock issuances, net
|
(8.6 | ) | (453,473 | ) | 8.6 | — | ||||||||||||||||||||||||||
|
Stock-based
employee compensation expense
|
5.6 | 5.6 | ||||||||||||||||||||||||||||||
|
Tax
effect of stock-based employee compensation expense
|
1.3 | 1.3 | ||||||||||||||||||||||||||||||
|
Stock
issued to directors as compensation
|
1,939 | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||
|
Issuance
of shares for options exercised
|
63,966 | — | 1.6 | 1.6 | ||||||||||||||||||||||||||||
|
Purchases
of treasury stock
|
— | — | — | 388,694 | (19.0 | ) | — | — | (19.0 | ) | ||||||||||||||||||||||
|
Balance,
September 30, 2010
|
18,699,140 | $ | 1.9 | $ | 205.7 | 693,571 | $ | 24.4 | $ | 325.4 | $ | 8.4 | $ | 517.0 | ||||||||||||||||||
3
SCHWEITZER-MAUDUIT
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOW
(dollars
in millions)
(Unaudited)
|
Nine Months Ended
|
||||||||
|
September 30,
2010
|
September 30,
2009
|
|||||||
|
Operations
|
||||||||
|
Net
income
|
||||||||
|
Less:
Loss from discontinued operations
|
$ | 51.6 | $ | 24.9 | ||||
|
Income
from continuing operations
|
5.2 | 19.2 | ||||||
| 56.8 | 44.1 | |||||||
|
Non-cash
items included in net income:
|
||||||||
|
Depreciation
and amortization
|
29.6 | 32.7 | ||||||
|
Asset
impairments and restructuring-related accelerated
depreciation
|
0.5 | 12.0 | ||||||
|
Amortization
of deferred revenue
|
(6.0 | ) | (4.3 | ) | ||||
|
Deferred
income tax provision
|
20.6 | 16.5 | ||||||
|
Pension
and other postretirement benefits
|
1.6 | (6.2 | ) | |||||
|
Stock-based
compensation
|
5.6 | 5.3 | ||||||
|
(Income)
loss from equity affiliate
|
(2.1 | ) | 1.4 | |||||
|
Other
items
|
(2.8 | ) | 1.2 | |||||
|
Net
changes in operating working capital
|
20.8 | (42.1 | ) | |||||
|
Net
cash provided by operating activities of:
|
||||||||
|
-
Continuing operations
|
124.6 | 60.6 | ||||||
|
-
Discontinued operations
|
(19.4 | ) | (6.9 | ) | ||||
|
Cash
Provided by Operations
|
105.2 | 53.7 | ||||||
|
Investing
|
||||||||
|
Capital
spending
|
(45.7 | ) | (7.7 | ) | ||||
|
Capitalized
software costs
|
(8.3 | ) | (3.8 | ) | ||||
|
Other
|
0.4 | (1.2 | ) | |||||
|
Cash
Used for Investing
|
(53.6 | ) | (12.7 | ) | ||||
|
Financing
|
||||||||
|
Cash
dividends paid to SWM stockholders
|
(8.1 | ) | (6.9 | ) | ||||
|
Changes
in short-term debt
|
2.9 | (21.1 | ) | |||||
|
Proceeds
from issuances of long-term debt
|
48.1 | 33.4 | ||||||
|
Payments
on long-term debt
|
(55.9 | ) | (61.1 | ) | ||||
|
Purchases
of treasury stock
|
(19.0 | ) | (0.8 | ) | ||||
|
Proceeds
from exercise of stock options
|
1.6 | 8.9 | ||||||
|
Excess
tax benefits of stock-based awards
|
1.3 | 1.0 | ||||||
|
Cash
Used in Financing
|
(29.1 | ) | (46.6 | ) | ||||
|
Effect
of Exchange Rate Changes on Cash
|
1.3 | 0.5 | ||||||
|
Increase
(Decrease) in Cash and Cash Equivalents
|
23.8 | (5.1 | ) | |||||
|
Cash
and Cash Equivalents at beginning of period
|
56.9 | 11.9 | ||||||
|
Cash
and Cash Equivalents at end of period
|
$ | 80.7 | $ | 6.8 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
4
NOTE
1. GENERAL
Nature
of Business
Schweitzer-Mauduit
International, Inc., or the Company, is a multinational diversified producer of
premium specialty papers headquartered in the United States of America. The
Company manufactures and sells paper and reconstituted tobacco products to the
tobacco industry as well as specialized paper products for use in other
applications. Tobacco industry products comprised 90% or more of the Company’s
consolidated net sales in the three and nine month periods ended September 30,
2010 and 2009, respectively. The primary products in the group include
cigarette, plug wrap and base tipping papers, or Cigarette Papers, used to wrap
various parts of a cigarette, reconstituted tobacco leaf, or RTL, which is used
as a blend with virgin tobacco in cigarettes and reconstituted tobacco wrappers
and binders for machine-made cigars. These products are sold directly to the
major tobacco companies or their designated converters in the Americas, Europe,
Asia and elsewhere. Non-tobacco industry products are a diverse mix of products,
certain of which represent commodity paper grades produced to maximize machine
operations.
The
Company is a manufacturer of high porosity papers, which are used in
manufacturing ventilated cigarettes, banded and print banded papers for the
production of lower ignition propensity, or LIP, cigarettes and the leading
independent producer of RTL used in producing blended cigarettes. The Company
conducts business in over 90 countries and currently operates 12 production
locations worldwide, with mills in the United States, France, the Philippines,
Indonesia, Brazil and Poland. The Company also has a 50% equity interest in a
paper mill in China.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements and the notes thereto
have been prepared in accordance with the instructions of Form 10-Q and Rule
10-01 of Regulation S-X of the Securities and Exchange Commission, or the SEC,
and do not include all of the information and disclosures required by accounting
principles generally accepted in the United States of America, or U.S.
GAAP. However, such information reflects all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair statement of results for the interim periods including the results of
a business reclassified as a discontinued operation which is more fully
described in Note 2 Discontinued Operations.
The
results of operations for the three and nine month periods ended September 30,
2010, are not necessarily indicative of the results to be expected for the full
year. The unaudited consolidated financial statements included herein should be
read in conjunction with the audited consolidated financial statements and the
notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009, as filed with the SEC on March 8, 2010.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and
wholly-owned, majority-owned and controlled subsidiaries. The Company’s share of
the net income (loss) of its 50% owned joint venture in China is included in the
consolidated statements of income as income (loss) from equity affiliates. All
significant intercompany balances and transactions have been
eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities in the consolidated financial statements and accompanying notes.
Estimates are used for, but not limited to, inventory valuation, useful lives,
fair values, sales returns, receivables valuation, pension, postretirement and
other benefits, restructuring and impairment, taxes and contingencies. Actual
results could differ materially from those estimates.
Recent
Accounting Pronouncements
Effective
January 1, 2010, the Company adopted the requirements of Accounting Standards
Codification (ASC) 810, “Amendments to FASB Interpretation No. 46R” which amends
the accounting guidance for consolidating variable interest entities and
eliminates the concept of qualifying special-purpose entities. The adoption of
this guidance did not have any impact on the Company’s consolidated financial
statements.
5
NOTE
2. DISCONTINUED OPERATIONS
Due to
ongoing losses, the Company decided in 2009 to close its Malaucène, France
finished tipping paper mill. During the quarter ended September 30, 2010, the
run off operations at our Malaucène, France mill were completed and, therefore
operations at our Malaucène mill are reported as discontinued operations for all
periods presented. Consequently, results of the Malaucène mill have been removed
from each line of the statements of income and the operating activities section
of the statements of cash flow. In each case a separate line has been added for
the net results of the discontinued operation, including previously reported
restructuring and impairment amounts.
In the
quarter ended September 30, 2010, the results of discontinued operations
included a $1.8 million accrued expense associated with severance accruals,
including $1.2 million related to claims by former employees seeking
additional severances, a $1.7 million charge for additional impairment of the
carrying value for machinery and equipment in connection with a revised estimate
of the equipment’s fair value and its reclassification to assets held for sale,
and a $1.2 million accrued expense for estimated costs for environmental
remediation obligation at the site based on a preliminary report of an
environmental study performed in connection with the mill closure.
Included
in the Consolidated Balance Sheets are the following major classes of assets and
liabilities associated with the discontinued operations ($ in
millions):
|
September 30, 2010
|
December 31, 2009
|
|||||||
|
Assets
of discontinued operations:
|
||||||||
|
Current
assets
|
$ | 0.3 | $ | 1.3 | ||||
|
Property,
plant and equipment, net
|
— | 3.4 | ||||||
|
Noncurrent
deferred income tax benefits
|
9.0 | 6.5 | ||||||
|
Other
assets – assets held for sale
|
1.5 | — | ||||||
|
Liabilities
of discontinued operations:
|
||||||||
|
Current
liabilities
|
10.8 | 26.3 | ||||||
|
Other
liabilities
|
2.7 | 3.6 | ||||||
Summary
comparative financial results of discontinued operations were as follows ($ in
millions):
|
Three Months Ended
September 30
|
Nine Months Ended
September 30
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net
sales
|
$ | 0.0 | $ | 2.6 | $ | 0.6 | $ | 20.3 | ||||||||
|
Restructuring
and impairment expense
|
4.6 | 8.4 | 6.9 | 20.9 | ||||||||||||
|
Loss
from discontinued operations before income taxes
|
(4.6 | ) | (13.0 | ) | (7.9 | ) | (29.1 | ) | ||||||||
|
Income
tax benefit
|
1.6 | 4.4 | 2.7 | 9.9 | ||||||||||||
|
Loss
from discontinued operations
|
$ | (3.0 | ) | $ | (8.6 | ) | $ | (5.2 | ) | $ | (19.2 | ) | ||||
NOTE
3. NET INCOME PER SHARE
The
Company uses the two-class method to calculate earnings per share. The Company
has granted restricted stock that contain nonforfeitable rights to dividends on
unvested shares. Since these unvested restricted shares are considered
participating securities under the two-class method, the Company allocates
earnings per share to common stock and participating securities according to
dividends declared and participation rights in undistributed
earnings.
6
Diluted
net income per common share is computed based on net income divided by the
weighted average number of common and potential common shares outstanding.
Potential common shares during the respective periods are those related to
dilutive stock-based compensation, including long-term share-based incentive
compensation, stock options outstanding, and directors’ accumulated deferred
stock compensation which may be received by the directors in the form of stock
or cash. A reconciliation of the average number of common and potential common
shares outstanding used in the calculations of basic and diluted net income per
share follows ($ in millions, shares in thousands):
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30,
2010
|
September 30,
2009
|
September 30,
2010
|
September 30,
2009
|
|||||||||||||
|
Numerator
(basic and diluted):
|
||||||||||||||||
|
Net
income
|
$ | 18.2 | $ | 4.5 | $ | 51.6 | $ | 24.9 | ||||||||
|
Less:
Dividends paid to participating securities
|
(0.1 | ) | — | (0.2 | ) | (0.1 | ) | |||||||||
|
Less:
Undistributed earnings available to participating
securities
|
(0.4 | ) | — | (1.0 | ) | (0.1 | ) | |||||||||
|
Undistributed
and distributed earnings available to common shareholders
|
$ | 17.7 | $ | 4.5 | $ | 50.4 | $ | 24.7 | ||||||||
|
Denominator:
|
||||||||||||||||
|
Average
number of common shares outstanding
|
17,641.0 | 15,313.0 | 17,755.0 | 15,196.5 | ||||||||||||
|
Effect
of dilutive stock-based compensation
|
366.2 | 593.9 | 346.9 | 305.9 | ||||||||||||
|
Average
number of common and potential common shares outstanding
|
18,007.2 | 15,906.9 | 18,101.9 | 15,502.4 | ||||||||||||
Certain
stock options outstanding during the periods presented were not included in the
calculations of diluted net income per share because the exercise prices of the
options were greater than the average market prices of the common shares during
the respective periods. There were no anti-dilutive stock options during the
three and nine month periods ended September 30, 2010 or the three months ended
September 30, 2009. For the nine month periods ended September 30, 2009, 491,100
share equivalents resulting from anti-dilutive stock options were not included
in the computations of diluted net income per share.
NOTE
4. INVENTORIES
The
following schedule details inventories by major class ($ in
millions):
|
September 30,
2010
|
December 31,
2009
|
|||||||
|
Raw
materials
|
$ | 29.7 | $ | 35.4 | ||||
|
Work
in process
|
27.4 | 30.5 | ||||||
|
Finished
goods
|
31.3 | 39.4 | ||||||
|
Supplies
and other
|
18.8 | 22.0 | ||||||
|
Total
|
$ | 107.2 | $ | 127.3 | ||||
NOTE
5. GOODWILL AND INTANGIBLE ASSETS
The
changes in the carrying amount of goodwill for each segment for the nine months
ended September 30, 2010 were as follows ($ in millions):
|
France
|
Brazil
|
Total
|
||||||||||
|
Balance
as of January 1, 2010
|
$ | 7.9 | $ | 1.1 | $ | 9.0 | ||||||
|
Foreign
currency translation adjustments
|
(0.3 | ) | — | (0.3 | ) | |||||||
|
Balance
as of September 30, 2010
|
$ | 7.6 | $ | 1.1 | $ | 8.7 | ||||||
7
The gross
carrying amount and accumulated amortization for amortizable intangible assets
consisted of the following ($ in millions):
|
September 30, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization*
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization*
|
Net
Carrying
Amount
|
|||||||||||||||||||
|
Customer-related
intangibles (French Segment)
|
$ | 10.0 | $ | 6.5 | $ | 3.5 | $ | 10.0 | $ | 4.9 | $ | 5.1 | ||||||||||||
* Accumulated
amortization also includes adjustments for foreign currency
translation.
Amortization
expense of intangible assets was $0.4 million and $1.3 million for the three and
nine months ended September 30, 2010, respectively, and $0.6 million and $1.6
million for the three and nine months ended September 30, 2009, respectively.
The Company’s customer-related intangibles are amortized to expense using the
150% declining balance method over a 6-year life. Estimated amortization expense
for the next four years is as follows (in millions of dollars):
2010—$1.9 million, 2011—$1.6 million, 2012—$1.2 million, and
2013—$0.4 million.
NOTE
6. INVESTMENT IN EQUITY AFFILIATE
The
Company’s joint venture with China National Tobacco Corporation, or CNTC, is
China Tobacco Mauduit (Jiangmen) Paper Industry Co. LTD, or CTM. CTM
has two paper machines which produce cigarette paper and porous plug wrap, both
of which started production in 2008. The Company uses the equity method to
account for its 50% ownership interest in CTM. At September 30, 2010 and
December 31, 2009, the Company’s equity investment in CTM was $19.1 million
and $16.6 million, respectively. The Company’s share of the net income
(loss) of CTM was included in income (loss) from equity affiliates within the
consolidated statements of income. CTM is contractually obligated to pay to each
the Company and CNTC a 2% royalty on net sales of cigarette and porous plug wrap
papers. CTM sells its products to CNTC and its subsidiaries.
Below is
summarized balance sheet information as of September 30, 2010 and
December 31, 2009 and income statement information of the China joint
venture for the three and nine months ended September 30, 2010 and 2009 ($ in
millions):
|
Balance Sheet Information
|
September 30,
|
December 31,
|
||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Current
assets
|
$ | 31.0 | $ | 20.9 | ||||
|
Noncurrent
assets
|
85.2 | 86.2 | ||||||
|
Current
debt
|
21.5 | 15.4 | ||||||
|
Other
current liabilities
|
6.9 | 6.5 | ||||||
|
Long-term
debt
|
49.2 | 51.8 | ||||||
|
Other
long-term liabilities
|
0.4 | 0.2 | ||||||
|
Stockholders’
equity
|
$ | 38.2 | $ | 33.2 | ||||
|
Statement of Operations Information
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(unaudited)
|
September 30,
|
September 30,
|
September 30,
|
September 30,
|
||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net
sales
|
$ | 11.6 | $ | 11.0 | $ | 27.9 | $ | 17.9 | ||||||||
|
Gross
profit
|
3.4 | 3.9 | 10.0 | 5.1 | ||||||||||||
|
Net
income (loss)
|
$ | 1.6 | $ | 2.0 | $ | 4.3 | $ | (2.9 | ) | |||||||
8
NOTE
7. RESTRUCTURING ACTIVITIES
The
Company incurred restructuring expenses of $0.7 million and $7.2 million in
the three and nine month periods ended September 30, 2010, respectively, and
$18.5 million and $19.6 million in the three and nine month periods ended
September 30, 2009, respectively, in connection with previously announced
restructuring activities. The following table summarizes the associated
cash and non-cash, pre-tax restructuring expense of the Company’s continuing
operations for the three and nine months ended September 30, 2010 and 2009 ($ in
millions):
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
France:
|
||||||||||||||||
|
Cash
Expense
|
||||||||||||||||
|
Severance
and other employee-related costs
|
$ | 1.5 | $ | 6.4 | $ | 6.8 | $ | 7.4 | ||||||||
|
Non-cash
Expense
|
||||||||||||||||
|
Accelerated
depreciation and other
|
— | 2.7 | — | 2.7 | ||||||||||||
|
Total
France Restructuring Expense
|
$ | 1.5 | $ | 9.1 | $ | 6.8 | $ | 10.1 | ||||||||
|
United
States:
|
||||||||||||||||
|
Cash
Expense
|
||||||||||||||||
|
Severance
and other employee-related costs
|
$ | — | $ | 0.1 | $ | 0.1 | $ | 0.1 | ||||||||
|
Other
|
0.1 | 0.1 | 0.3 | 0.2 | ||||||||||||
|
Non-cash
Expense
|
||||||||||||||||
|
Accelerated
depreciation, asset impairment charges and other
|
0.1 | 9.2 | 0.5 | 9.2 | ||||||||||||
|
Total
United States Restructuring Expense
|
$ | 0.2 | $ | 9.4 | $ | 0.9 | $ | 9.5 | ||||||||
|
Brazil:
|
||||||||||||||||
|
Cash
Expense
|
||||||||||||||||
|
Severance
and other employee-related costs
|
$ | — | $ | — | $ | 0.5 | $ | — | ||||||||
|
Gain
on sale of assets
|
(1.0 | ) | — | (1.0 | ) | — | ||||||||||
|
Total
Brazil Restructuring Expense
|
$ | (1.0 | ) | $ | — | $ | (0.5 | ) | $ | — | ||||||
|
Summary
|
||||||||||||||||
|
Total
Cash Expense
|
$ | 0.6 | $ | 6.6 | $ | 6.7 | $ | 7.7 | ||||||||
|
Total
Non-cash Expense.
|
0.1 | 11.9 | 0.5 | 11.9 | ||||||||||||
|
Total
Restructuring Expense
|
$ | 0.7 | $ | 18.5 | $ | 7.2 | $ | 19.6 | ||||||||
Restructuring
liabilities were classified within accrued expenses in each of the consolidated
balance sheets as of September 30, 2010 and December 31, 2009. Changes in the
restructuring liabilities during the nine month period ended September 30, 2010
and the year ended December 31, 2009 are summarized as follows ($ in
millions):
|
Nine Months Ended
|
Year Ended
|
|||||||
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Balance
at beginning of year
|
$ | 12.1 | $ | 1.7 | ||||
|
Accruals
for announced programs
|
7.7 | 12.4 | ||||||
|
Cash
payments
|
(6.2 | ) | (2.0 | ) | ||||
|
Exchange
rate impacts
|
(0.9 | ) | — | |||||
|
Balance
at end of period
|
$ | 12.7 | $ | 12.1 | ||||
Of the
previously announced restructuring activities, unamortized severances of $3.3
million are still to be recorded to restructuring expense over the remaining
service lives of affected employees, which is expected to be fully amortized in
the first quarter of 2011.
9
NOTE
8. DEBT
Total
debt is summarized in the following table ($ in millions):
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Credit
Agreement
|
||||||||
|
U.
S. Revolver
|
$ | — | $ | 33.0 | ||||
|
Euro
Revolver
|
34.0 | 11.5 | ||||||
|
French
Employee Profit Sharing
|
11.5 | 11.0 | ||||||
|
Bank
Overdrafts
|
4.3 | 2.5 | ||||||
|
Other
|
2.8 | 2.1 | ||||||
|
Total
Debt
|
52.6 | 60.1 | ||||||
|
Less:
Current debt
|
8.6 | 17.7 | ||||||
|
Long-Term
Debt
|
$ | 44.0 | $ | 42.4 | ||||
Credit
Agreement
The
Company’s Credit Agreement provides for maximum borrowings of $95 million under
its U.S. dollar revolving credit facility, or U.S. Revolver, and 80 million
euros under its euro revolving credit facility, or Euro Revolver. Availability
under the U.S. Revolver increased to $95.0 million as of September 30, 2010 from
$62.0 million as of December 31, 2009. Availability under the Euro Revolver
decreased to 55.0 million euros, or $74.9 million, as of September 30, 2010 from
72.0 million euros, or $103.8 million, as of December 31, 2009.
As of
December 31, 2009, the applicable interest rate on the U.S. Revolver was 0.6%.
At September 30, 2010 and December 31, 2009, the applicable interest rate on the
Euro Revolver was 1.0% and 0.8%, respectively.
The
Credit Agreement contains representations and warranties which are customary for
facilities of this type and covenants and provisions that, among other things,
require the Company to maintain (a) a net debt to equity ratio not to exceed 1.0
and (b) a net debt to adjusted EBITDA ratio not to exceed 3.0. Under the Credit
Agreement, interest rates are at market rates, based on the London Interbank
Offered Rate, or LIBOR, for U.S. dollar borrowings and the Euro Interbank
Offered Rate, or EURIBOR, for euro borrowings, plus an applicable margin that
varies from 0.35% to 0.75% per annum depending on the Net Debt to Adjusted
EBITDA Ratio, as defined in the Credit Agreement. The Company incurs commitment
fees at an annual rate of either 0.30% or 0.35% of the applicable margin on the
committed amounts not drawn, depending on the Net Debt to Adjusted EBITDA Ratio
as defined in the Credit Agreement. The Company also incurs utilization fees of
0.25% per annum when outstanding borrowings exceed 50% of the total credit
facility.
French
Employee Profit Sharing
At
September 30, 2010 and December 31, 2009, debt of $11.5 million and $11.0
million, respectively, consists of obligations of the French operations related
to government-mandated profit sharing. Each year, representatives of the workers
at each of the French businesses can make an election to invest the profit
sharing amounts from the most recent year in a financial institution or to
invest the funds with their respective employer. To the extent the funds are
invested with the Company, these amounts bear interest at the 5-year treasury
note rate in France, 3.60% and 3.97% at September 30, 2010 and December 31,
2009, respectively, and are generally payable in the fifth year subsequent to
the year the profit sharing is accrued.
Bank
Overdrafts and Other
The
Company had bank overdraft facilities of $34.2 million and $33.9 million as of
September 30, 2010 and December 31, 2009, respectively, of which $29.9 million
and $31.4 million was available at September 30, 2010 and December 31, 2009,
respectively.
Other
debt consists of non-interest bearing French segment debt with deferred capital
repayment from governmental and commercial institutions primarily related to
environmental capital improvements and debt in the Philippines.
10
Interest
Expense and Rate Swap Agreements
The
Company capitalized $0.1 million and $0.2 million of interest expense in the
three and nine months ended September 30, 2010, respectively, due to the ongoing
construction of a new RTL facility in the Philippines.
The
Company maintains interest rate swap agreements on portions of its long-term
debt. As a result, as of September 30, 2010, the LIBOR rates on $33.0 million of
the Company’s variable-rate long-term debt were fixed at 2.1% through March
2012. The impact of the swap agreements on the consolidated financial statements
was not material for the three and nine months ended September 30, 2010 and
2009. See Note 9. Derivatives for more information.
NOTE
9. DERIVATIVES
In the
normal course of business, the Company is exposed to foreign currency exchange
rate risk and interest rate risk on its variable-rate debt. To manage these
risks, the Company utilizes a variety of practices including, where considered
appropriate, derivative instruments. The Company has no derivative instruments
for trading or speculative purposes nor any derivatives with credit risk related
contingent features. All derivative instruments used by the Company are either
exchange traded or are entered into with major financial institutions in order
to reduce credit risk and risk of nonperformance by third parties. The fair
values of the Company’s derivative instruments are determined using observable
inputs and are considered Level 2 assets or liabilities.
The
Company utilizes currency forward, swap and, to a lesser extent, option
contracts to selectively hedge its exposure to foreign currency transaction risk
when it is practical and economical to do so. The use of these contracts
minimizes transactional exposure to exchange rate changes. Usually, these
contracts extend for no more than 12 months. We designate certain of our foreign
currency hedges as cash flow hedges. Changes in the fair value of cash flow
hedges are reported as a component of other comprehensive income (loss) and
reclassified into earnings when the forecasted transaction affects earnings. For
foreign exchange contracts not designated as cash flow hedges, changes in the
contracts’ fair value are recorded to net income each period.
The
Company selectively hedges its exposure to interest rate increases on
variable-rate, long-term debt when it is practical and economical to do so. The
Company utilizes various forms of interest rate hedge agreements, including
interest rate swap agreements, typically with contractual terms no longer than
24 months. Changes in the fair value of our interest rate swaps are recorded to
net income each period. See Note 8, Debt for more information about our interest
rate swaps.
The
following table presents the fair value of asset and liability derivatives and
the respective balance sheet locations at September 30, 2010 ($ in
millions):
|
Asset Derivatives
|
Liability Derivatives
|
||||||||||
|
Balance Sheet
Location
|
Fair
Value
|
Balance Sheet
Location
|
Fair
Value
|
||||||||
|
Derivatives
designated as hedges:
|
|||||||||||
|
Foreign
exchange contracts
|
Accounts
Receivable
|
$ | 5.3 |
Accounts
Payable
|
$ | — | |||||
|
Foreign
exchange contracts
|
Other
Assets
|
1.6 |
Other
Liabilities
|
— | |||||||
|
Total
derivatives designated as hedges
|
6.9 | — | |||||||||
|
Derivatives
not designated as hedges:
|
|||||||||||
|
Interest
rate contracts
|
Other
Assets
|
— |
Other
Liabilities
|
0.8 | |||||||
|
Total
derivatives not designated as hedges
|
— | ||||||||||
|
Total
derivatives
|
$ | 6.9 | $ | 0.8 | |||||||
11
The
following table presents the fair value of asset and liability derivatives and
the respective balance sheet locations at December 31, 2009 ($ in
millions):
|
Asset Derivatives
|
Liability Derivatives
|
||||||||||
|
Balance Sheet
Location
|
Fair
Value
|
Balance Sheet
Location
|
Fair
Value
|
||||||||
|
Derivatives
designated as hedges:
|
|||||||||||
|
Foreign
exchange contracts
|
Accounts
Receivable
|
$ | 7.3 |
Accounts
Payable
|
$ | — | |||||
|
Foreign
exchange contracts
|
Other
Assets
|
1.5 |
Other
Liabilities
|
— | |||||||
|
Total
derivatives designated as hedges
|
8.8 | — | |||||||||
|
Derivatives
not designated as hedges:
|
|||||||||||
|
Interest
rate contracts
|
Other
Assets
|
— |
Other
Liabilities
|
0.4 | |||||||
|
Foreign
exchange contracts
|
Accounts
Receivable
|
— |
Accounts
Payable
|
0.2 | |||||||
|
Total
derivatives not designated as hedges
|
— | 0.6 | |||||||||
|
Total
derivatives
|
$ | 8.8 | $ | 0.6 | |||||||
The
following tables provide the effect derivative instruments in cash flow hedging
relationships had on accumulated other comprehensive income (loss), or AOCI, and
results of operations ($ in millions):
|
The Effect of Cash Flow Hedge Derivative Instruments on the Consolidated Statement of Income
for the Three and Nine Months Ended September 30, 2010
|
||||||||||||||
|
Change in
AOCI
Gain /
(Loss)
|
Location of Gain
/(Loss)
reclassified from
AOCI into
Income
(Effective
Portion)
|
Gain /(Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
|
Location of Gain /
(Loss) Recognized in
Income (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
|
Gain / (Loss)
Recognized in
Income (Ineffective
Portion and
Amount excluded
from Effectiveness
Testing)
|
||||||||||
|
Derivatives
designated as hedges:
|
||||||||||||||
|
Three
Months Ended:
|
||||||||||||||
|
Foreign
exchange contracts
|
$ | (1.8 | ) |
Net
Sales
|
$ | 2.1 |
Other
Income/ (Expense)
|
$ | — | |||||
|
Nine
Months Ended
|
||||||||||||||
|
Foreign
exchange contracts
|
$ | (4.7 | ) |
Net
Sales
|
$ | 5.5 |
Other
Income/ (Expense)
|
$ | — | |||||
|
The Effect of Cash Flow Hedge Derivative Instruments on the Consolidated Statement of Income
for the Three and Nine Months Ended September 30, 2009
|
||||||||||||||
|
Change in
AOCI
Gain
/ (Loss)
|
Location of Gain
/(Loss)
reclassified
from
AOCI into
Income
(Effective
Portion)
|
Gain /(Loss)
Reclassified
from AOCI
into
Income
(Effective
Portion)
|
Location of Gain /
(Loss) Recognized in
Income (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
|
Gain / (Loss)
Recognized in
Income (Ineffective
Portion and
Amount
excluded
from
Effectiveness
Testing)
|
||||||||||
|
Derivatives
designated as hedges:
|
||||||||||||||
|
Three
Months Ended
|
||||||||||||||
|
Foreign
exchange contracts
|
$ | 2.4 |
Net
Sales
|
$ | 1.2 |
Other
Income/
(Expense)
|
$ | — | ||||||
|
Nine
Months Ended
|
||||||||||||||
|
Foreign
exchange contracts
|
$ | 6.7 |
Net
Sales
|
$ | 1.3 |
Other
Income/
(Expense)
|
$ | — | ||||||
12
The
following tables provide the effect derivative instruments not designated as
hedging instruments had on net income ($ in millions):
|
Derivatives not designated as
hedging instruments
|
Location of Gain / (Loss)
Recognized in Income on
Derivatives
|
Amount of Gain / (Loss) Recognized in
Income on Derivatives for the Three
Months Ended
|
||||||||
|
September 30, 2010
|
September 30, 2009
|
|||||||||
|
Interest
rate contracts
|
Other
Income / Expense
|
$ | (0.1 | ) | $ | (0.4 | ) | |||
|
Foreign
exchange contracts
|
Other
Income / Expense
|
— | 0.2 | |||||||
|
Total
|
$ | (0.1 | ) | $ | (0.2 | ) | ||||
|
Derivatives not designated as
hedging instruments
|
Location of Gain / (Loss)
Recognized in Income on
Derivatives
|
Amount of Gain / (Loss) Recognized in Income on
Derivatives for the Nine Months Ended
|
||||||||
|
September 30, 2010
|
September 30, 2009
|
|||||||||
|
Interest
rate contracts
|
Other
Income / Expense
|
$ | (0.5 | ) | $ | — | ||||
|
Foreign
exchange contracts
|
Other
Income / Expense
|
(0.1 | ) | (0.5 | ) | |||||
|
Total
|
$ | (0.6 | ) | $ | (0.5 | ) | ||||
NOTE
10. COMMITMENTS AND CONTINGENCIES
Litigation
The
Company is involved in various legal proceedings and disputes (see Note 16,
Commitments and Contingencies, of the Notes to Consolidated Financial Statements
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2009). Except as noted below, there have been no material developments to these
matters during 2010.
Class
Action
On March
31, 2010, the City of Pontiac General Employees’ Retirement System, individually
and on behalf of all others similarly situated, sued Schweitzer-Mauduit
International, Inc., its Chief Executive Officer, Frédéric P. Villoutreix, and
its Chief Financial Officer, Peter J. Thompson, in the United States District
Court for the Northern District of Georgia for alleged violations of certain
sections and rules of the Securities Act of 1934. The plaintiffs’ identified a
putative class period covering August 5, 2009 to February 10, 2010. The primary
allegations of the suit contend that the defendants misrepresented the strength
of the Company’s competitive position in the U.S. and its ability to withstand
European competition, particularly in the area of lower ignition propensity
papers. Further, the complaint alleges that the defendants concealed threats to
the Company’s relationship with Phillip Morris USA, Inc. As a consequence of
these alleged misrepresentations or omissions, the plaintiffs contend that the
Company’s stock price was artificially inflated causing the plaintiffs to be
damaged in an unspecified amount. The court issued an order on August 26, 2010
appointing as co-Lead Plaintiffs the City of Pontiac General Employees'
Retirement System and the Western Washington Laborers-Employers Pension Trust.
Robbins Geller Rudman & Dowd was appointed Lead Counsel. Plaintiffs filed an
Amended Consolidated Complaint, which becomes the operative complaint in the
case going forward. The
Company believes that the allegations are without merit as to all defendants and
intends to vigorously defend the matter as to itself and its two officers. The
Company believes the outcome of this litigation will not have a material adverse
impact on the Company’s financial condition.
Imposto sobre Circulação de
Mercadorias e Serviços, or ICMS
As
previously disclosed in our filing on Form 10-K for the year ended December 31,
2009, in January 2010, the State of Rio de Janeiro attempted to execute a tax
foreclosure to collect Assessment 2001.001.064544.6. The Company responded by
filing two actions, one in the court of the State of Rio de Janeiro to stay the
tax foreclosure and a second action for a writ of prevention filed with the
Supreme Court of Brazil.
On May
27, 2010, the State of Rio de Janeiro imposed a freeze of SWM-B’s bank
accounts. In June 2010, the Supreme Court of Brazil granted the writ of
prevention and stayed the execution of the tax foreclosure by the State of Rio
de Janeiro. On July 1, 2010, based on the Supreme Court’s order granting
the writ of prevention, the local court in Pirahy removed the freeze imposed on
SWM-B’s bank accounts. Based on the foreign currency exchange rate at September
30, 2010, the Assessment totaled approximately $32 million, of which
approximately $15 million is covered by indemnification. No liability has been
recorded in our consolidated financial statements for the Assessment based on
our evaluation that SWM-B is more likely than not to prevail in its challenge of
the Assessment under the facts and law as presently understood.
13
French Employee Claims for
Additional Severances
In
connection with the closure of the Malaucène mill, approximately 150 previously
severed employees have filed claims for additional severances in the respective
labor tribunal, alleging a lack of economic justification for closure of the
mill or that the Company did not follow the precise legal requirements around
identifying and offering other jobs within the SWM worldwide group. The Company
intends to defend these claims vigorously, however based on a preliminary
evaluation of these claims it is probable that we will incur additional
severances in order to resolve this matter. In the three and nine month periods
ended September 30, 2010, the results of discontinued operations included $1.2
million and $2.8 million, respectively, of accrued pre-tax expenses associated
with these claims.
Environmental
Matters
The
Company’s operations are subject to federal, state and local laws, regulations
and ordinances relating to various environmental matters. The nature of the
Company’s operations exposes it to the risk of claims with respect to
environmental matters, and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. While the
Company has incurred in the past several years, and will continue to
incur,capital and operating expenditures in order to comply with environmental
laws and regulations, it believes that its future cost of compliance with
environmental laws, regulations and ordinances, and its exposure to liability
for environmental claims and its obligation to participate in the remediation
and monitoring of certain hazardous wastedisposal sites, or as a result of
environmental remediation associated with any of its plant closures, will not
have a material adverse effect on its financial condition or results of
operations. However, future events, such as changes in existing laws and
regulations, or future claims for remediation of contamination of sites
presently or previously owned, operated or used for waste disposal by the
Company (including contamination caused by prior owners and operators of such
sites or other waste generators) may give rise to additional costs which could
have a material adverse effect on its financial condition or results of
operations.
As a
result of the Company’s 2009 decision to close the Malaucène mill, discussion
ensued with local authorities regarding ongoing environmental obligations. The
Company undertook an environmental study of the site in coordination with local
authorities. Based on a preliminary report recently received from that study,
the Company concluded that it is probable that it will incur remediation costs
and that its best estimate of such costs as of September 30, 2010 was
approximately $1.2 million. This obligation is partially dependent upon the
outcome of additional tests and accessibility of site contaminants. The Company
accrued $1.2 million pre-tax expense in results of discontinued operations in
the three month period ended September 30, 2010 associated with this
obligation.
Purchase
Obligations
We expect
to spend approximately $25 million for equipment to make LIP cigarette papers in
Europe. Capital spending to-date on this project has totaled $12.7 million
through the first nine months of 2010. Of the remainder, approximately $8.7
million is under contract as of September 30, 2010, substantially all of which
will be paid for during the remainder of 2010.
Other
In
Brazil, we are currently generating more value-added tax credits than we
utilize. As of September 30, 2010, these credits totaled $13.9 million and are
classified in other assets in the consolidated balance sheet. We have applied on
behalf of the paper industry in the State of Rio de Janeiro for a special
government action to enable more rapid utilization of these credits. We expect
approval and, if successful, this and other actions should allow our Brazilian
operation to utilize more credits than it generates on an annual basis. These
credits do not expire; however, if the actions are not successful, we may record
an allowance against the current balance.
Philip
Morris – USA includes in its payments against invoices for banded papers a
notice that it disputes the manner in which the Company has calculated costs for
banded cigarette papers under a cost-plus based contract for this product. Such
action is required under the applicable law to preserve PM-USA’s right to bring
a claim to recover the alleged overpayments, which to date PM-USA has not done.
Currently, the disputed portion of the payments made by PM-USA is approximately
$19.3 million. The Company believes that it has properly calculated the amount
it invoiced.
14
NOTE
11. POSTRETIREMENT AND OTHER BENEFITS
The
Company sponsors pension benefits in the United States, France, the Philippines
and Canada and postretirement healthcare and life insurance, or OPEB, benefits
in the United States and Canada. The Company’s Canadian and Philippines pension
and OPEB benefits are not material and therefore are not included in the
following disclosures.
Pension
and OPEB Benefits
The
components of net pension and OPEB benefit costs for U.S. employees and net
pension benefit costs for French employees during the three and nine month
periods ended September 30, 2010 and 2009 were as follows ($ in
millions):
|
Three Months Ended September 30
|
||||||||||||||||||||||||
|
U.S. Pension Benefits
|
French Pension Benefits
|
U.S. OPEB Benefits
|
||||||||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||
|
Service
cost
|
$ | — | $ | — | $ | 0.2 | $ | 0.2 | $ | 0.1 | $ | 0.1 | ||||||||||||
|
Interest
cost
|
1.5 | 1.8 | 0.4 | 0.2 | — | 0.2 | ||||||||||||||||||
|
Expected
return on plan assets
|
(2.2 | ) | (1.8 | ) | (0.2 | ) | (0.3 | ) | — | — | ||||||||||||||
|
Amortizations
and other
|
0.7 | 1.1 | 0.1 | 0.1 | — | — | ||||||||||||||||||
|
Net
periodic benefit cost
|
$ | — | $ | 1.1 | $ | 0.5 | $ | 0.2 | $ | 0.1 | $ | 0.3 | ||||||||||||
|
Nine Months Ended September 30
|
||||||||||||||||||||||||
|
U.S. Pension Benefits
|
French Pension Benefits
|
U.S. OPEB Benefits
|
||||||||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||
|
Service
cost
|
$ | — | $ | — | $ | 0.6 | $ | 0.9 | $ | 0.1 | $ | 0.1 | ||||||||||||
|
Interest
cost
|
4.7 | 5.0 | 1.0 | 1.5 | 0.5 | 0.6 | ||||||||||||||||||
|
Expected
return on plan assets
|
(6.6 | ) | (5.0 | ) | (0.6 | ) | (0.7 | ) | — | — | ||||||||||||||
|
Amortizations
and other
|
2.3 | 2.9 | 0.3 | 0.5 | — | — | ||||||||||||||||||
|
Net
periodic benefit cost
|
$ | 0.4 | $ | 2.9 | $ | 1.3 | $ | 2.2 | $ | 0.6 | $ | 0.7 | ||||||||||||
During
the full-year 2010, the Company expects to recognize approximately $3.1 million
for amortization of accumulated other comprehensive loss related to its U.S.
pension and OPEB plans and approximately $0.3 million for its French pension
plans.
The
Company made no contributions to its pension plans during the nine months ended
September 30, 2010. The Company paid $0.1 million and $0.6 million during the
three and nine month periods ended September 30, 2010, respectively, for its
U.S. OPEB benefits and expects to pay a total of approximately $1 million during
the full-year 2010 for such benefits.
NOTE
12. INCOME TAXES
Income
from continuing operations before income taxes was $31.1 million and $84.8
million for the three and nine month periods ended September 30, 2010,
respectively, and $18.6 million and $66.0 million for the three and nine months
ended September 30, 2009, respectively.
A
reconciliation of income taxes computed at the U.S. federal statutory income tax
rate to the provision (benefit) for income taxes is as follows ($ in
millions):
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||||||
|
September 30,
2010
|
September 30,
2009
|
September 30,
2010
|
September 30,
2009
|
|||||||||||||||||||||||||||||
|
Tax
provision at U.S. statutory rate
|
$ | 10.9 | 35.0 | % | $ | 6.5 | 35.0 | % | $ | 29.7 | 35.0 | % | $ | 23.1 | 35.0 | % | ||||||||||||||||
|
Tax
benefits of foreign legal structure
|
(0.7 | ) | (2.2 | ) | (0.8 | ) | (4.3 | ) | (1.3 | ) | (1.5 | ) | (2.5 | ) | (3.8 | ) | ||||||||||||||||
|
French
tax classification change
|
0.6 | 1.9 | — | — | 1.8 | 2.1 | — | — | ||||||||||||||||||||||||
|
Other,
net.
|
(0.1 | ) | (0.3 | ) | 0.8 | 4.3 | (0.1 | ) | (0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||||||||||||||
|
Provision
for income taxes
|
$ | 10.7 | 34.4 | % | $ | 6.5 | 35.0 | % | $ | 30.1 | 35.5 | % | $ | 20.5 | 31.1 | % | ||||||||||||||||
Tax
benefits of foreign legal structure result from net foreign tax deductions from
the restructuring of the Company’s foreign operations in 2003. The proportionate
effect of this item on the overall effective income tax rate decreases as
earnings increase. A French tax law change, effective January 1, 2010, resulted
in a certain tax which was previously a business tax now being classified as an
income tax for U.S. GAAP accounting purposes.
15
At
September 30, 2010 and December 31, 2009, the Company had no significant
unrecognized tax benefits related to income taxes. The Company’s policy with
respect to penalties and interest in connection with income tax assessments or
related to unrecognized tax benefits is to classify penalties as provision for
income taxes and interest as interest expense in its consolidated income
statement. There were no material income tax penalties or interest accrued
during any of the three or nine month periods ended September 30, 2010 or
2009.
The
Company files income tax returns in the U.S. Federal and several state
jurisdictions as well as in many foreign jurisdictions. With certain exceptions,
the Company is no longer subject to U.S. Federal, state and local, or foreign
income tax examinations for years before 2006.
NOTE
13. SEGMENT INFORMATION
The
Company operates and manages three reportable segments: United States, or U.S.,
France and Brazil. These segments are based on the geographical location of the
Company’s manufacturing operations. These business segments manufacture and sell
Cigarette Papers used to wrap various parts of a cigarette and reconstituted
tobacco products, as well as certain non-tobacco industry products. While the
products are similar in each segment, they vary based on customer requirements
and the manufacturing capabilities of each of the operations. Sales by a segment
into markets primarily served by a different segment occur where specific
product needs cannot be cost-effectively met by the manufacturing operations
domiciled in that segment.
The
accounting policies of these segments are the same as those described in Note 2,
Summary of Significant Accounting Policies, in the Notes to Consolidated
Financial Statements in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009. The Company primarily evaluates segment performance and
allocates resources based on operating profit and cash flow.
For
purposes of the segment disclosure in the following tables, the term “United
States” includes operations in the United States and Canada. The Canadian
operations only produce flax fiber used as raw material in the U.S. operations.
The term “France” includes operations in France, the Philippines and Indonesia
because the results of the Philippine and Indonesian operations are not material
for segment reporting purposes and their sales are integrated with sales of the
Company’s French operations in southeast Asia. Sales of products between
segments are made at market prices and elimination of these sales is referred to
in the following tables as intersegment sales. Expense amounts not associated
with segments are referred to as unallocated expenses.
Net
Sales
($ in
millions)
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||||||
|
September 30, 2010
|
September 30, 2009
|
September 30, 2010
|
September 30, 2009
|
|||||||||||||||||||||||||||||
|
France
|
$ | 103.5 | 56.9 | % | $ | 114.6 | 63.0 | % | $ | 320.1 | 57.4 | % | $ | 320.4 | 60.3 | % | ||||||||||||||||
|
United
States
|
70.0 | 38.5 | 58.0 | 31.9 | 209.7 | 37.6 | 187.8 | 35.3 | ||||||||||||||||||||||||
|
Brazil
|
22.8 | 12.5 | 18.3 | 10.0 | 63.5 | 11.4 | 55.4 | 10.4 | ||||||||||||||||||||||||
|
Subtotal
|
196.3 | 107.9 | 190.9 | 104.9 | 593.3 | 106.4 | 563.6 | 106.0 | ||||||||||||||||||||||||
|
Intersegment
sales by
|
||||||||||||||||||||||||||||||||
|
France
|
(8.1 | ) | (4.5 | ) | (2.8 | ) | (1.6 | ) | (18.2 | ) | (3.3 | ) | (11.7 | ) | (2.2 | ) | ||||||||||||||||
|
United
States
|
(0.1 | ) | — | (0.2 | ) | (0.1 | ) | (0.8 | ) | (0.1 | ) | (1.4 | ) | (0.3 | ) | |||||||||||||||||
|
Brazil
|
(6.1 | ) | (3.4 | ) | (5.9 | ) | (3.2 | ) | (16.9 | ) | (3.0 | ) | (18.8 | ) | (3.5 | ) | ||||||||||||||||
|
Subtotal
|
(14.3 | ) | (7.9 | ) | (8.9 | ) | (4.9 | ) | (35.9 | ) | (6.4 | ) | (31.9 | ) | (6.0 | ) | ||||||||||||||||
|
Consolidated
|
$ | 182.0 | 100.0 | % | $ | 182.0 | 100.0 | % | $ | 557.4 | 100.0 | % | $ | 531.7 | 100.0 | % | ||||||||||||||||
Operating
Profit
($ in
millions)
|
Three Months Ended
|
Three Months Ended
|
|||||||||||||||||||||||||||||||
|
September 30,
2010
|
September 30,
2009
|
September 30,
2010
|
September 30,
2009
|
|||||||||||||||||||||||||||||
|
France
|
$ | 17.2 | 56.0 | % | $ | 18.6 | 96.3 | % | $ | 48.1 | 55.5 | % | $ | 48.7 | 69.6 | % | ||||||||||||||||
|
United
States
|
16.1 | 52.4 | 4.2 | 21.8 | 47.5 | 54.8 | 29.7 | 42.4 | ||||||||||||||||||||||||
|
Brazil
|
2.4 | 7.8 | 1.5 | 7.8 | 3.8 | 4.4 | 6.9 | 9.9 | ||||||||||||||||||||||||
|
Unallocated
|
(5.0 | ) | (16.2 | ) | (5.0 | ) | (25.9 | ) | (12.7 | ) | (14.7 | ) | (15.3 | ) | (21.9 | ) | ||||||||||||||||
|
Consolidated
|
$ | 30.7 | 100.0 | % | $ | 19.3 | 100.0 | % | $ | 86.7 | 100.0 | % | $ | 70.0 | 100.0 | % | ||||||||||||||||
16
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following is a discussion of our results of operations, current financial
position and cash flows. This discussion should be read in conjunction with our
unaudited consolidated financial statements and related notes included elsewhere
in this report and the audited consolidated financial statements and related
notes and the selected financial data included in Item 6 of our Annual Report on
Form 10-K for the year ended December 31, 2009.
During
the quarter ended September 30, 2010, the run off operations at our Malaucène,
France mill were completed and, therefore operations at our Malaucène mill are
reported as discontinued operations for all periods presented. Consequently,
results of the Malaucène mill have been removed from each line of the statements
of income and the operating activities section of the statements of cash flow.
In each case a separate line has been added for the net results of the
discontinued operation, including previously reported restructuring and
impairment amounts. See Note 2, Discontinued Operations, in Part I, Item 1 of
this document for more information.
The
discussion of our results of operations and financial position includes various
forward-looking statements about our markets, the demand for our products and
our future results. These statements are based on certain assumptions that we
consider reasonable. For information about risks and exposures relating to our
business and our company, you should read the section entitled “Factors That May
Affect Future Results” included in our Annual Report on Form 10-K for the year
ended December 31, 2009. Unless the
context indicates otherwise, references to “we,” “us,” “our,” or similar terms
include Schweitzer-Mauduit International, Inc. and our consolidated
subsidiaries.
Executive
Summary
($
in millions, except per share amounts)
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||||||||||||||||
|
September 30, 2010
|
September 30, 2009
|
September 30, 2010
|
September 30,
2009
|
|||||||||||||||||||||||||||||
|
Net
sales
|
$ | 182.0 | 100.0 | % | $ | 182.0 | 100.0 | % | $ | 557.4 | 100.0 | % | $ | 531.7 | 100.0 | % | ||||||||||||||||
|
Gross
profit
|
49.5 | 27.2 | 55.0 | 30.2 | 148.3 | 26.6 | 142.8 | 26.9 | ||||||||||||||||||||||||
|
Restructuring
& impairment expense
|
0.7 | 0.4 | 18.5 | 10.2 | 7.2 | 1.3 | 19.6 | 3.7 | ||||||||||||||||||||||||
|
Operating
profit
|
30.7 | 16.9 | 19.3 | 10.6 | 86.7 | 15.6 | 70.0 | 13.2 | ||||||||||||||||||||||||
|
Interest
expense
|
0.4 | 0.2 | 0.8 | 0.4 | 1.4 | 0.3 | 3.7 | 0.7 | ||||||||||||||||||||||||
|
Income
from continuing operations
|
21.2 | 11.6 | 13.1 | 7.2 | 56.8 | 10.2 | 44.1 | 8.3 | ||||||||||||||||||||||||
|
Loss
from discontinued operations
|
(3.0 | ) | (1.6 | ) | (8.6 | ) | (4.7 | ) | (5.2 | ) | (0.9 | ) | (19.2 | ) | (3.6 | ) | ||||||||||||||||
|
Net
income
|
18.2 | 10.0 | % | 4.5 | 2.5 | % | 51.6 | 9.3 | % | 24.9 | 4.7 | % | ||||||||||||||||||||
|
Diluted
earnings per share from continuing operations
|
$ | 1.14 | $ | 0.80 | $ | 3.06 | $ | 2.81 | ||||||||||||||||||||||||
|
Diluted
earnings per share
|
$ | 0.98 | $ | 0.27 | $ | 2.78 | $ | 1.59 | ||||||||||||||||||||||||
|
Cash
provided by operations
|
$ | 30.5 | $ | 30.8 | $ | 105.2 | $ | 53.7 | ||||||||||||||||||||||||
|
Capital
spending
|
$ | 19.9 | $ | 3.1 | $ | 45.7 | $ | 7.7 | ||||||||||||||||||||||||
17
Third
Quarter Highlights
Net sales
were $182.0 million in the three months ended September 30, 2010, unchanged from
the prior-year quarter. Net sales increased $8.3 million from an improved mix of
products sold and higher selling prices and $1.1 million from increased sales
volumes. These increases were fully offset by $9.4 million impact from
unfavorable foreign currency exchange rate impacts.
Gross
profit was $49.5 million in the three months ended September 30, 2010, a
decrease of $5.5 million from the prior-year quarter. The gross profit margin
was 27.2%, decreased from 30.2% in the prior-year quarter. Restructuring and
impairment expenses were $0.7 million and $18.5 million for the three month
periods ended September 30, 2010 and 2009, respectively. Operating profit was
$30.7 million in the three month period ended September 30, 2010 versus $19.3
million in the prior-year quarter. The lower gross profit was primarily due to
$6.4 million in higher inflationary costs primarily from higher wood pulp, $6.1
million from unfavorable absorption of fixed expenses due to lower production
volumes, $3.3 million from unfavorable foreign currency translation impacts and
$1.2 million from changes in sales volumes. Partially offsetting these
unfavorable impacts were $8.8 million in lower production costs including the
benefit of restructuring actions and other operational improvement efforts and
$3.2 million from an improved mix of products sold and higher selling prices.
Operating profit was favorably impacted by a reduction in restructuring and
impairment expenses of $17.8 million, reflecting actions recorded during the
third quarter of 2009 related to events in the U.S. and France partially offset
by $0.9 million from increased non-manufacturing expenses primarily associated
with implementation of computer system improvements and corporate strategic
studies partially offset by lower incentive compensation expense.
In the
third quarter of 2010, interest expense compared to prior-year quarter declined
as a result of lower average debt levels and lower interest rates. The loss from
discontinued operations, which was associated with the idled Malaucène, France
finished tipping paper facility, declined by $5.6 million during the third
quarter compared to the prior year. SWM net income and diluted net income per
share improved versus the prior-year by $13.7 million and $0.71 per share,
respectively.
Capital
spending was $19.9 million and $3.1 million during the three months ended
September 30, 2010 and 2009, respectively. The increase in capital spending was
primarily due to construction and equipment spending of $12.2 million for a new
RTL production facility and $4.8 million to establish LIP production capability
in the European Union, or EU, included in the 2010 period.
Year-to-Date
Highlights
Net
sales were $557.4 million in the nine months ended September 30, 2010, a 4.8%
increase over the prior-year period. Net sales increased $25.7 million as a
result of $21.6 million from an improved mix of products sold and higher selling
prices and $4.9 million in higher volumes. These increases were partially offset
by $0.8 million in unfavorable foreign currency exchange rate
impacts.
Gross
profit was $148.3 million in the nine months ended September 30, 2010, an
increase of $5.5 million from the prior-year period. The gross profit margin was
26.6%, essentially unchanged as compared to 26.9% in the prior-year period.
Restructuring and impairment expenses were $7.2 million and $19.6 million for
the nine month periods ended September 30, 2010 and 2009, respectively.
Operating profit was $86.7 million in the nine month period ended September 30,
2010 versus $70.0 million in the prior-year period. After the $12.4 million
reduction in restructuring expense, the higher gross profit and operating profit
were both primarily due to $23.5 million from improved mill operations including
the benefit of cost savings efforts and $5.9 million from a favorable mix of
products sold and higher selling prices. These benefits were partially offset by
$12.8 million in higher inflationary costs primarily from higher wood pulp, $7.0
million from unfavorable fixed cost absorption due to lower production volumes
and $2.8 million in unfavorable foreign currency exchange rate
impacts.
Interest
expense was lower by $2.3 million as a result of lower average debt levels and
lower interest rates. Income from SWM’s paper Chinese joint venture, CTM,
increased $3.5 million. The net loss from discontinued operations, which are
associated with the idled Malaucène, France finished tipping paper facility,
declined by $14.0 million. SWM net income and diluted net income per share
improved versus the prior-year by $26.7 million and $1.19 per share,
respectively.
Capital
spending was $45.7 million and $7.7 million during the nine months ended
September 30, 2010 and 2009, respectively. The increase in capital spending was
primarily due to construction and equipment spending of $22.0 million for a new
RTL production facility and $12.7 million to establish LIP production capability
in the EU included in the 2010 period.
18
Recent
Developments
Lower
Ignition Propensity Cigarettes
The
Company is establishing capacity to produce its proprietary Alginex® LIP
cigarette paper in three European locations in advance of EU
regulations requiring cigarettes to be LIP compliant. Both our EU
customers and EU regulatory officials have informally communicated to us that
compliance with EU LIP regulations is expected no later than early
2012. Certain of our EU customers have indicated to us their plans to
begin purchases of LIP cigarette paper from SWM up to three months prior to
regulatory enforcement; therefore, we expect that their demand for print banded
papers will begin during the second half of 2011
Our EU
production capacity will be operational and able to meet customer demand well
within the projected timeframe. The three SWM production locations
will include a third-party manufacturing facility in Belgium, a new wholly-owned
operation in Łódź, Poland and a
third operation at the Company’s paper manufacturing facility, Papeteries de
Mauduit (PdM), located in Quimperlé, France. The Łódź facility,
called SWM-Poland, is expected to be the main production center of LIP solutions
for the Company in Europe. The SWM-Poland facility is projected to be
operational in November 2010 upon completion of equipment installation and
building modification investments which are estimated to be approximately $25
million. Project costs through September 30, 2010 were $12.7
million. The capacity of the SWM-Poland facility could be expanded
beyond the initial planned level if customer commitments warrant such
action. Any such further expansion of our planned capacity could be
operational in approximately 12 to 15 months.
The
Company has concluded a multi-year supply agreement with one of the major EU
cigarette manufacturer and is engaged in ongoing negotiations with most of the
other industry participants. Based on the informal advice of our
customers, we expect most, if not all, of the major EU cigarette manufacturers
to conclude their procurement arrangements by early first quarter
2011. We would expect that such commercial arrangements would reflect
comparable increased margins over conventional cigarette papers that the value
added print banded products have commanded in other markets where lower ignition
propensity cigarettes have been mandated.
RTL
Philippines Construction
Construction
of the Company’s greenfield RTL facility in the Philippines progressed according
to schedule and operations are still expected to commence in late 2011.
Primary activities included fabrication of key equipment components and
construction activity concentrated on the facility’s building structures.
Total project costs cumulatively through September 30, 2010 were $25.9
million including $22.0 million incurred in year-to-date 2010. Projections for
total project costs remain consistent with initial estimates at approximately
$117 million. Upcoming activity will continue to be focused on site
construction and equipment fabrication.
These
investments will be funded from existing credit facilities and available
cash.
19
Three Months Ended September
30, 2010 Compared with the Three Months Ended September 30,
2009
|
Net Sales
|
Three Months Ended
|
Consolidated
Sales
|
||||||||||||||||||
|
(dollars in millions)
|
September 30,
2010
|
September 30,
2009
|
Change
|
Percent
Change
|
Volume
Change
|
|||||||||||||||
|
France
|
$ | 103.5 | $ | 114.6 | $ | (11.1 | ) | (9.7 | )% | (7.7 | )% | |||||||||
|
United
States
|
70.0 | 58.0 | 12.0 | 20.7 | (5.2 | ) | ||||||||||||||
|
Brazil
|
22.8 | 18.3 | 4.5 | 24.6 | 12.7 | |||||||||||||||
|
Subtotal
|
196.3 | 190.9 | 5.4 | |||||||||||||||||
|
Intersegment
|
(14.3 | ) | (8.9 | ) | (5.4 | ) | ||||||||||||||
|
Total
|
$ | 182.0 | $ | 182.0 | $ | — | — | % | (4.4 | )% | ||||||||||
Net sales
were $182.0 million in the three month period ended September 30, 2010 compared
with $182.0 million in the prior-year quarter. The offsetting changes
in the determinants of net sales consisted of the following ($ in
millions):
|
Amount
|
Percent
|
|||||||
|
Changes
in currency exchange rates
|
$ | (9.4 | ) | (5.2 | )% | |||
|
Changes
due to volume
|
1.1 | 0.6 | ||||||
|
Changes
in product mix and selling prices
|
8.3 | 4.6 | ||||||
|
Total
|
$ | — | — | % | ||||
|
|
·
|
Changes
in currency exchange rates had an unfavorable impact on net sales of $9.4
million, or 5.2%, in the three month period ended September 30, 2010 and
primarily reflected the impact of a weaker euro compared with the U.S.
dollar in the third quarter of 2010 versus the prior-year
quarter.
|
|
|
·
|
A
sales mix which included a higher proportion of high-value products,
including cigarette paper for LIP cigarettes, and higher selling prices
had a favorable impact of $8.3 million, or 4.6%, on net
sales.
|
|
|
·
|
Unit
sales volumes decreased by 4.4% in the three month period ended September
30, 2010 versus the prior-year quarter. Changes in sales volume
had a $1.1 million impact on net
sales.
|
|
|
o
|
Sales
volumes for the French segment decreased by
7.7%.
|
|
|
o
|
Sales
volumes in the United States decreased by
5.2%
|
|
|
o
|
Brazil
experienced increased sales volumes of 12.7% as the result of increased
sales of certain tobacco-related
products.
|
French segment net sales of
$103.5 million in the three month period ended September 30, 2010 decreased by
$11.1 million, or 9.7%, versus $114.6 million in the prior-year
quarter. The decrease in net sales was primarily the result of a
weaker euro relative to the U.S. dollar.
The U.S. segment net sales of
$70.0 million in the three month period ended September 30, 2010 increased by
$12.0 million, or 20.7%, compared with $58.0 million in the prior-year
quarter. The increase in net sales of the U.S. segment resulted from
an improved mix of products sold, higher selling prices and changes in sales
volume.
The Brazil segment net sales
of $22.8 million in the three month period ended September 30, 2010 increased by
$4.5 million, or 24.6%, from $18.3 million in the prior-year
quarter. The change was primarily due to increased sales volume and
the favorable currency translation impacts on net sales from a stronger
Brazilian real.
Gross
Profit
(dollars
in millions)
|
Three Months Ended
|
||||||||||||||||||||||||
|
September 30,
2010
|
September 30,
2009
|
Change
|
Percent
Change
|
Percent of Net Sales
|
||||||||||||||||||||
|
2010
|
2009
|
|||||||||||||||||||||||
|
Net
Sales
|
$ | 182.0 | $ | 182.0 | $ | — | — | % | 100.0 | % | 100.0 | % | ||||||||||||
|
Cost
of products sold
|
132.5 | 127.0 | 5.5 | 4.3 | 72.8 | 69.8 | ||||||||||||||||||
|
Gross
Profit
|
$ | 49.5 | $ | 55.0 | $ | (5.5 | ) | (10.0 | )% | 27.2 | % | 30.2 | % | |||||||||||
Inflationary
cost increases, primarily related to higher per ton wood pulp prices, had an
unfavorable impact on operating expenses of $6.4 million during the three month
period ended September 30, 2010 compared with the prior-year
quarter. The average per ton list price of northern bleached softwood
kraft pulp in the United States was $990 per metric ton during the three month
period ended September 30, 2010 compared with $730 per metric ton during the
prior-year quarter.
20
Unfavorable
fixed cost absorption from reduced production volumes and foreign currency
exchange rate impacts unfavorably impacted gross profit by $6.1 million and 3.3
million, respectively.
Gross
profit was favorably impacted by $8.8 million from lower cost including benefits
of cost savings programs and improved mill operations.
Nonmanufacturing
Expenses
(dollars
in millions)
|
Three Months Ended
|
||||||||||||||||||||||||
|
September 30,
2010
|
September 30,
2009
|
Change
|
Percent
Change
|
Percent of Net Sales
|
||||||||||||||||||||
|
2010
|
2009
|
|||||||||||||||||||||||
|
Selling
expense
|
$ | 4.5 | $ | 4.3 | $ | 0.2 | 4.7 | % | 2.5 | % | 2.4 | % | ||||||||||||
|
Research
expense
|
2.1 | 1.9 | 0.2 | 10.5 | 1.1 | 1.0 | ||||||||||||||||||
|
General
expense
|
11.5 | 11.0 | 0.5 | 4.5 | 6.3 | 6.1 | ||||||||||||||||||
|
Nonmanufacturing
expenses
|
$ | 18.1 | $ | 17.2 | $ | 0.9 | 5.2 | % | 9.9 | % | 9.5 | % | ||||||||||||
Nonmanufacturing
expenses increased by $0.9 million, or 5.2%, to $18.1 million from $17.2 million
in the prior-year quarter, primarily due to expenses related to a computer
system implementation and strategic corporate studies partially offset by lower
incentive compensation accruals.
Restructuring
and Impairment Expense
Total
restructuring and impairment expense of $0.7 million was recognized during the
three month period ended September 30, 2010 related to employee severance
expenses in France net of a $1.0 million gain on the sale of a previously
impaired paper machine of our Brazilian business. Total restructuring
and impairment expense of $18.5 million was recognized during the prior-year
quarter which was comprised of $6.5 million for severance-related and other cash
costs and $12.0 million for other non-cash charges.
Operating
Profit
($ in
millions)
|
Three Months Ended
|
Return on Net
|
|||||||||||||||||||
|
September 30,
|
September 30,
|
Sales
|
||||||||||||||||||
|
2010
|
2009
|
Change
|
2010
|
2009
|
||||||||||||||||
|
France
|
$ | 17.2 | $ | 18.6 | $ | (1.4 | ) | 16.6 | % | 16.2 | % | |||||||||
|
United
States
|
16.1 | 4.2 | 11.9 | 23.0 | 7.2 | |||||||||||||||
|
Brazil
|
2.4 | 1.5 | 0.9 | 10.5 | 8.2 | |||||||||||||||
|
Subtotal
|
35.7 | 24.3 | 11.4 | |||||||||||||||||
|
Unallocated
expenses
|
(5.0 | ) | (5.0 | ) | — | |||||||||||||||
|
Total
|
$ | 30.7 | $ | 19.3 | $ | 11.4 | 16.9 | % | 10.6 | % | ||||||||||
Operating
profit was $30.7 million in the three month period ended September 30, 2010
compared with $19.3 million during the prior-year quarter. Operating
results were higher in the U.S. and Brazil but lower in France.
The French segment’s
operating profit was $17.2 million in the three month period ended September 30,
2010, a decrease of $1.4 million from the prior-year quarter. The
decrease was primarily due to:
|
|
·
|
$4.6
million in higher inflationary costs, primarily from wood
pulp
|
|
|
·
|
$3.8
million from decreased sales volume
|
|
|
·
|
$3.3
million from unfavorable foreign currency exchange rate
impacts
|
|
|
·
|
These negative factors were
partially offset by lower restructuring expense of $7.6 million and
improved mill operations and benefits of cost savings
program
|
The U.S. segment’s operating
profit was $16.1 million in the three month period ended September 30, 2010, an
$11.9 million increase from $4.2 million in the prior-year
quarter. The increase was primarily due to:
|
|
·
|
$9.2
million in lower restructuring and impairment related expenses reflecting
the write-off the Spotswood, New Jersey Number 17 paper machine during the
third quarter of 2009
|
21
|
|
·
|
$5.4
million from increased selling prices, primarily due to an improved
product mix reflecting full LIP regulation in the U.S. market and the
benefit of changes in sales volumes
|
Brazil’s operating profit was
$2.4 million during the three month period ended September 30, 2010, compared
with a $1.5 million during the prior-year quarter. The increased
operating profit was primarily due to:
|
|
·
|
Decreased
restructuring and impairment expenses of $1.0
million
|
|
|
·
|
Increased
average selling prices of $1.2
million
|
|
|
·
|
These
factors were partially offset by higher inflationary expenses of $1.2
million and increased nonmanufacturing expenses of $0.9 million primarily
associated with the implementation of a new computer
system
|
Non-Operating
Expenses
Interest
expense of $0.4 million in the three month period ended September 30, 2010
decreased from $0.8 million in the prior-year quarter. Average debt
levels were lower during the three month period ended September 30, 2010 versus
the prior-year quarter, and our weighted average effective interest rate was
lower. The weighted average effective interest rates on our debt
facilities were approximately 1.8% and 1.7% for the three month periods ended
September 30, 2010 and 2009, respectively.
Other
income, net was $0.8 million and $0.1 million for the three month periods ended
September 30, 2010 and 2009, respectively, primarily due to foreign currency
transaction impacts and interest income.
Income
Taxes
The
provision for income taxes in the three month period ended September 30, 2010
reflected an effective tax rate of 34.4% compared with 35.0% in the prior-year
quarter. A French law, effective January 1, 2010, changed a business
tax to an income tax for U.S. GAAP accounting purposes. The higher
absolute level of taxable earnings in the current year period reduced the
percentage benefit on the effective tax rate of our foreign holding company tax
structure.
Income
from Equity Affiliates
Income
from equity affiliates was $0.8 million in the three months ended September 30,
2010 compared with $1.0 million during the three months ended September 30,
2009. These results reflected the operations of our joint venture in
China. The joint venture’s sales volume and production yields are essentially
equal to the prior-year quarter when the operation first reached profitable
levels of operations.
Discontinued
Operations
Operations
at our Malaucène mill are reported as discontinued operations for all periods
presented. Consequently, results of the Malaucène mill have been
removed from each line of the statements of income and the operating activities
section of the statements of cash flow. In each case a separate line
has been added for the net results of the discontinued operation, including
previously reported restructuring and impairment amounts. In
the quarter ended September 30, 2010, the results of discontinued operations
included $1.8 million of accrued expenses associated with severance accruals,
including $1.2 million related to claims by former employees seeking
additional severances, a $1.7 million charge for additional impairment of the
carrying value for machinery and equipment in connection with a revised estimate
of the equipment’s fair value and its reclassification to assets held for sale
and a $1.2 million accrued expense for estimated costs for environmental
remediation obligation at the site based on a preliminary report of an
environmental study performed in connection with the mill closure.
Net
Income and Income per Share
Net
income for the three month period ended September 30, 2010 was $18.2 million, or
$0.98 per diluted share, compared with $4.5 million, or $0.27 per share, during
the prior-year quarter. The increase in net income in 2010 was
primarily due to decreased restructuring and impairment expenses, an increase in
mix to higher-value products, higher average selling prices and benefits of cost
savings programs including strategic actions taken over the last four years to
restructure the business.
22
Nine Months Ended September
30, 2010 Compared with the Nine Months Ended September 30,
2009
|
Net Sales
|
Nine Months Ended
|
Consolidated
Sales
|
||||||||||||||||||
|
(dollars in millions)
|
September 30,
2010
|
September 30,
2009
|
Change
|
Percent
Change
|
Volume
Change
|
|||||||||||||||
|
France
|
$ | 320.1 | $ | 320.4 | $ | (0.3 | ) | (0.1 | )% | (2.0 | )% | |||||||||
|
United
States
|
209.7 | 187.8 | 21.9 | 11.7 | 12.6 | |||||||||||||||
|
Brazil
|
63.5 | 55.4 | 8.1 | 14.6 | 6.4 | |||||||||||||||
|
Subtotal
|
593.3 | 563.6 | 29.7 | |||||||||||||||||
|
Intersegment
|
(35.9 | ) | (31.9 | ) | (4.0 | ) | ||||||||||||||
|
Total
|
$ | 557.4 | $ | 531.7 | $ | 25.7 | 4.8 | % | 0.9 | % | ||||||||||
Net sales
were $557.4 million in the nine month period ended September 30, 2010 compared
with $531.7 million in the prior-year period. The increase of $25.7
million, or 4.8%, consisted of the following ($ in millions):
|
Amount
|
Percent
|
|||||||
|
Changes
in product mix and selling prices
|
$ | 21.6 | 4.1 | % | ||||
|
Changes
due to volume
|
4.9 | 0.9 | ||||||
|
Changes
in currency exchange rates
|
(0.8 | ) | (0.2 | ) | ||||
|
Total
|
$ | 25.7 | 4.8 | % | ||||
|
|
·
|
A
sales mix which included a higher proportion of high-value products,
including cigarette paper for LIP cigarettes, and higher selling prices
had a favorable impact of $21.6 million, or 4.1%, on net
sales.
|
|
|
·
|
Unit
sales volumes increased by 0.9% in the nine month period ended September
30, 2010 versus the prior-year
period.
|
|
|
o
|
Sales
volumes for the French segment decreased by 2.0%, primarily reflecting a
decline in RTL sales volume offsetting growth in paper sales
volume.
|
|
|
o
|
Sales
volumes in the United States increased by 12.6%, primarily due to a 51%
increase in sales volume of LIP cigarette
papers.
|
|
|
o
|
Brazil
experienced increased sales volumes of 6.4% as the result of higher sales
of certain tobacco-related
products.
|
|
|
·
|
Changes
in currency exchange rates had an unfavorable impact on net sales of $0.8
million, or 0.2%, in the nine month period ended September 30, 2010 and
primarily reflected the impact of a weaker euro compared with the U.S.
dollar during the third quarter of 2010 versus the prior-year
period.
|
French segment net sales of
$320.1 million in the nine month period ended September 30, 2010 decreased by
$0.3 million, or 0.1%, versus $320.4 million in the prior-year
period. The decrease in net sales was primarily the result of changes
in sales volumes more than offsetting unfavorable foreign currency exchange rate
impacts, primarily from a weaker euro to U.S. dollar relationship, and an
unfavorable mix resulting in lower average selling prices.
The U.S. segment net sales of
$209.7 million in the nine month period ended September 30, 2010 increased by
$21.9 million, or 11.7%, compared with $187.8 million in the prior-year
period. The increase in net sales of the U.S. segment resulted from
an improved mix of products sold and higher selling prices.
The Brazil segment net sales
of $63.5 million in the nine month period ended September 30, 2010 increased by
$8.1 million, or 14.6%, from $55.4 million in the prior-year
period. The change was primarily due to the favorable currency
translation impacts on net sales from a stronger Brazilian real.
Gross
Profit
(dollars
in millions)
|
Nine Months Ended
|
||||||||||||||||||||||||
|
September 30,
2010
|
September 30,
2009
|
Change
|
Percent
Change
|
Percent of Net Sales
|
||||||||||||||||||||
|
2010
|
2009
|
|||||||||||||||||||||||
|
Net
Sales
|
$ | 557.4 | $ | 531.7 | $ | 25.7 | 4.8 | % | 100.0 | % | 100.0 | % | ||||||||||||
|
Cost
of products sold
|
409.1 | 388.9 | 20.2 | 5.2 | 73.4 | 73.1 | ||||||||||||||||||
|
Gross
Profit
|
$ | 148.3 | $ | 142.8 | $ | 5.5 | 3.9 | % | 26.6 | % | 26.9 | % | ||||||||||||
23
Gross
profit was favorably impacted by benefits of cost savings programs and improved
mill operations, as well as a favorable mix of products sold and higher average
selling prices.
Inflationary
cost increases, primarily related to higher per ton wood pulp prices, had an
unfavorable impact on operating expenses of $12.5 million during the nine month
period ended September 30, 2010 compared with the prior-year
period. The average per ton list price of northern bleached softwood
kraft pulp in the United States was $950 per metric ton during the nine month
period ended September 30, 2010 compared with $680 per metric ton during the
prior-year period.
Nonmanufacturing
Expenses
(dollars
in millions)
|
Nine Months Ended
|
||||||||||||||||||||||||
|
September 30,
2010
|
September 30,
2009
|
Change
|
Percent
Change
|
Percent of Net Sales
|
||||||||||||||||||||
|
2010
|
2009
|
|||||||||||||||||||||||
|
Selling
expense
|
$ | 14.3 | $ | 14.0 | $ | 0.3 | 2.1 | % | 2.6 | % | 2.6 | % | ||||||||||||
|
Research
expense
|
6.2 | 5.9 | 0.3 | 5.1 | 1.1 | 1.1 | ||||||||||||||||||
|
General
expense
|
33.9 | 33.3 | 0.6 | 1.8 | 6.1 | 6.3 | ||||||||||||||||||
|
Nonmanufacturing
expenses
|
$ | 54.4 | $ | 53.2 | $ | 1.2 | 2.3 | % | 9.8 | % | 10.0 | % | ||||||||||||
Nonmanufacturing
expenses increased by $1.2 million, or 2.3%, to $54.4 million from $53.2 million
in the prior-year period, primarily due to costs associated with implementation
of a computer system and corporate strategic studies partially offset by lower
incentive compensation accruals.
Restructuring
and Impairment Expense
Total
restructuring and impairment expense of $7.2 million was recognized during the
nine month period ended September 30, 2010, primarily for French severance
expenses at PdM being recorded over the remaining service period of affected
employees. Total restructuring and impairment expense of $19.6 million was
recognized during the prior-year period which was comprised of $7.7 million for
severance-related and other cash costs and $11.9 million for other non-cash
charges.
Operating
Profit
($ in
millions)
|
Nine Months Ended
|
Return
on Net
|
|||||||||||||||||||
|
September 30,
|
September 30,
|
Sales
|
||||||||||||||||||
|
2010
|
2009
|
Change
|
2010
|
2009
|
||||||||||||||||
|
France
|
$ | 48.1 | $ | 48.7 | $ | (0.6 | ) | 15.0 | % | 15.2 | % | |||||||||
|
United
States
|
47.5 | 29.7 | 17.8 | 22.7 | 15.8 | |||||||||||||||
|
Brazil
|
3.8 | 6.9 | (3.1 | ) | 6.0 | 12.5 | ||||||||||||||
|
Subtotal
|
99.4 | 85.3 | 14.1 | |||||||||||||||||
|
Unallocated
expenses
|
(12.7 | ) | (15.3 | ) | 2.6 | |||||||||||||||
|
Total
|
$ | 86.7 | $ | 70.0 | $ | 16.7 | 15.6 | % | 13.2 | % | ||||||||||
Operating
profit was $86.7 million in the nine month period ended September 30, 2010
compared with $70.0 million during the prior-year period. Operating
results were higher in the U.S., essentially unchanged in France and lower in
Brazil.
The French segment’s
operating profit was $48.1 million in the nine month period ended September 30,
2010, a decrease of $0.6 million from $48.7 million in the prior-year
period. The decrease was primarily due to:
|
|
·
|
$7.3
million in higher inflationary costs primarily from wood
pulp
|
|
|
·
|
Changes
in sales volume unfavorably impacting operating profit by $3.0
million
|
|
|
·
|
Unfavorable
currency impacts of $2.3 million due to the weaker euro against the dollar
primarily during the third quarter of 2010 compared to the third quarter
of 2009
|
|
|
·
|
These
negative factors were partially offset by $9.8 million of improved mill
operations and benefits of cost savings programs as well as $3.3 million
of lower restructuring expense.
|
24
The U.S. segment’s operating
profit was $47.5 million in the nine month period ended September 30, 2010, a
$17.8 million increase from operating profit of $29.7 million in the prior-year
period. The increase was primarily due to:
|
|
·
|
An
$8.6 million decrease in restructuring and impairment expense reflecting
the expenses incurred primarily during the third quarter of 2009 for now
completed actions
|
|
|
·
|
Improved
mill operations and benefits of cost savings
programs
|
|
|
·
|
A
$6.4 million benefit from a favorable mix of products sold and higher
selling prices, primarily due to higher sales of paper for LIP
cigarettes
|
|
|
·
|
These
positive factors were partially offset by $3.4 million in higher
nonmanufacturing expense, and a $2.0 million impact of higher inflationary
costs.
|
Brazil’s operating profit was
$3.8 million during the nine month period ended September 30, 2010, compared to
$6.9 million during the prior-year period. The decreased operating
profit was primarily due to higher inflationary costs of $3.2
million.
Non-Operating
Expenses
Interest
expense of $1.4 million in the nine month period ended September 30, 2010
decreased from $3.7 million in the prior-year period. Average debt
levels were lower during the nine month period ended September 30, 2010 versus
the prior-year period, and our weighted average effective interest rate was
lower. The weighted average effective interest rates on our debt
facilities were approximately 1.7% and 2.4% for the nine month periods ended
September 30, 2010 and 2009, respectively.
Other
expense, net was $0.5 million and $0.3 million for the nine month periods ended
September 30, 2010 and 2009, respectively, primarily due to foreign currency
transaction impacts, net of interest income.
Income
Taxes
The
provision for income taxes in the nine month period ended September 30, 2010
reflected an effective tax rate of 35.5% compared with 31.1% in the prior-year
period. The difference in effective tax rates was primarily due to
higher absolute levels of taxable earnings which reduced the percentage benefit
on the effective tax rate of our foreign holding company tax structure and a
French law, effective January 1, 2010, which changed a business tax to an income
tax for U.S. GAAP accounting purposes.
Income
(Loss) from Equity Affiliates
Income
from equity affiliates was $2.1 million in the nine months ended September 30,
2010 compared with a loss of $1.4 million during the nine months ended September
30, 2009. These results reflected the operations of our joint venture
in China. The joint venture’s sales volume and production yields increased
during the first half of 2010 compared to the majority of the prior-year period
when it was still in the early stages of its operations.
Discontinued
Operations
Operations
at our Malaucène mill are reported as discontinued operations for all periods
presented. Consequently, results of the Malaucène mill have been
removed from each line of the statements of income and the operating activities
section of the statements of cash flow. In each case a separate line
has been added for the net results of the discontinued operation, including
previously reported restructuring and impairment amounts. In the nine
month period ended September 30, 2010, the results of discontinued operations
included $1.2 million of severance expenses recorded over the remaining service
period of affected employees, $2.8 million of accrued expenses associated with
claims by former employees seeking additional severances, a $1.7 million charge
for additional impairment of the carrying value for machinery and equipment in
connection with a revised estimate of the equipment’s fair value and its
reclassification to assets held for sale and a $1.2 million accrued expense for
estimated costs for environmental remediation obligation at the site based on a
preliminary report of an environmental study performed in connection with the
mill closure.
Net
Income and Income per Share
Net
income for the nine month period ended September 30, 2010 was $51.6 million, or
$2.78 per diluted share, compared with $24.9 million, or $1.59 per share, during
the prior-year period. The increase in net income in 2010 was
primarily due to an increase in mix to higher-value products, higher average
selling prices and benefits of cost savings programs including strategic actions
taken over the last four years to restructure the business.
25
Liquidity and Capital
Resources
A major
factor in our liquidity and capital resource planning is our generation of cash
flow from operations, which is sensitive to changes in the sales mix, volume and
pricing of our products, as well as changes in our production volumes, costs and
working capital. Our liquidity is supplemented by funds available under our
revolving credit facility with a syndicate of banks that is used as either
operating conditions or strategic opportunities warrant.
Cash
Requirements
As of
September 30, 2010, we had net operating working capital of $67.6 million and
cash and cash equivalents of $80.7 million, compared with net operating working
capital of $78.1 million and cash and cash equivalents of $56.9 million as of
December 31, 2009. Changes in these amounts include the impacts of
changes in currency exchange rates which are not included in the changes in
operating working capital presented on the consolidated statements of cash
flow.
Cash
Flows from Operating Activities
|
($ in millions)
|
Nine Months Ended
|
|||||||
|
September
30,
2010
|
September
30,
2009
|
|||||||
|
Income
from continuing operations
|
$ | 56.8 | $ | 44.1 | ||||
|
Non-cash
items included in net income:
|
||||||||
|
Depreciation
and amortization
|
29.6 | 32.7 | ||||||
|
Asset
impairments and restructuring-related accelerated
depreciation
|
0.5 | 12.0 | ||||||
|
Amortization
of deferred revenue
|
(6.0 | ) | (4.3 | ) | ||||
|
Deferred
income tax provision
|
20.6 | 16.5 | ||||||
|
Pension
and other postretirement benefits
|
1.6 | (6.2 | ) | |||||
|
Stock-based
compensation
|
5.6 | 5.3 | ||||||
|
(Income)
loss from equity affiliate
|
(2.1 | ) | 1.4 | |||||
|
Other
items
|
(2.8 | ) | 1.2 | |||||
|
Net
changes in operating working capital
|
20.8 | (42.1 | ) | |||||
|
Net
cash provided (used) by operating activities of:
|
||||||||
|
Continuing
operations
|
124.6 | 60.6 | ||||||
|
Discontinued
operations
|
(19.4 | ) | (6.9 | ) | ||||
|
Cash
Provided by Operations
|
$ | 105.2 | $ | 53.7 | ||||
Net cash
provided by operations was $105.2 million in the nine months ended September 30,
2010 compared with $53.7 million provided by operations in the prior-year
period. Our net cash provided by operations changed favorably by
$51.5 million in 2010 compared to the prior-year period, primarily due to $20.8
million favorable changes in operating working capital in 2010 versus
unfavorable changes in operating working capital in 2009 and higher net
income.
|
Operating
Working Capital
|
||||||||
|
($ in millions)
|
Nine Months Ended
|
|||||||
|
September 30,
2010
|
September 30,
2009
|
|||||||
|
Changes
in operating working capital
|
||||||||
|
Accounts
receivable
|
$ | (16.2 | ) | $ | (1.2 | ) | ||
|
Inventories
|
17.4 | (13.2 | ) | |||||
|
Prepaid
expenses
|
(1.7 | ) | 1.1 | |||||
|
Accounts
payable
|
3.9 | (16.7 | ) | |||||
|
Accrued
expenses
|
— | 8.1 | ||||||
|
Accrued
income taxes
|
17.4 | (20.2 | ) | |||||
|
Net
changes in operating working capital
|
$ | 20.8 | $ | (42.1 | ) | |||
In the nine month period ended September 30, 2010, net changes in operating working capital contributed favorably to cash flow by $20.8 million, primarily due to receipt of a French income tax refund in the 2010 period and decreases in inventory. These were partially offset by increases in accounts receivable due to higher sales and payments of previously accrued restructuring costs. During the full year 2010, the Company expects to pay approximately $27 million in restructuring costs primarily for employee severances most of which have already been accrued. We expect remaining accrued severances to be paid in 2011.
26
In the
prior-year period, net changes in operating working capital contributed
unfavorably to cash flow by $42.1 million, primarily due to lower accrued income
taxes as a result of estimated income tax payments in France which were refunded
in 2010 and to lower accounts payable in part as a result of a French law
limiting vendor payment terms to 60 days.
|
Cash
Flows from Investing Activities
(dollars in millions)
|
Nine Months Ended
|
|||||||
|
September 30,
2010
|
September 30,
2009
|
|||||||
|
Capital
spending
|
$ | (45.7 | ) | $ | (7.7 | ) | ||
|
Capitalized
software costs
|
(8.3 | ) | (3.8 | ) | ||||
|
Other
|
0.4 | (1.2 | ) | |||||
|
Cash
Used for Investing
|
$ | (53.6 | ) | $ | (12.7 | ) | ||
Cash used
for investing activities was $53.6 million in the nine month period ended
September 30, 2009 versus $12.7 million during the prior-year
quarter.
Capital
Spending and Capitalized Software Costs
Capital
spending was $45.7 million and $7.7 million in the nine month periods ended
September 30, 2010 and 2009, respectively. The increase in capital
spending was primarily due to construction of a new reconstituted tobacco
facility in the Philippines and establishing LIP production capabilities in the
EU for which capital spending of $22.0 million and $12.7 million, respectively,
was incurred in the nine month period ended September 30, 2010. We expect to
spend a total of approximately $117 million on the new reconstituted tobacco
facility in the Philippines of which approximately $35 million to $50 million
will be incurred during the full year 2010 and $45 million is under contract as
of September 30, 2010. We expect to spend a total of approximately $25 million
for equipment to make LIP cigarette papers in Europe. Capital
spending to-date on this project has totaled $12.7 million through the first
nine months of 2010. Of the remainder, approximately $8.7 million is
under contract as of September 30, 2010, substantially all of which will be paid
for during the remainder of 2010.
Capitalized
software costs were $8.3 million and $3.8 million for the nine month periods
ended September 30, 2010 and 2009, respectively. During the full year 2010, the
Company expects to spend a total of approximately $10 million to implement new
enterprise resource planning software in Brazil and the United
States.
In the
nine months ended September 30, 2009, no individual capital projects exceeded
$1.0 million of capital spending.
We incur
spending necessary to meet legal requirements and otherwise relating to the
protection of the environment at our facilities in the United States, France,
the Philippines, Indonesia, Brazil and Canada. For these purposes, we
expect to incur capital expenditures of approximately $2 to $3 million in 2010
and less than $1 million in 2011, of which no material amount is the result of
environmental fines or settlements. The foregoing capital
expenditures are not expected to reduce our ability to invest in other
appropriate and necessary capital projects and are not expected to have a
material adverse effect on our financial condition or results of
operations.
Total
capital spending for 2010 is expected to be $75 million to $90 million,
including the above-mentioned $60 to $75 million for the planned RTL expansion
in the Philippines and EU LIP expansion.
|
Cash
Flows from Financing Activities
($ in millions)
|
Nine Months Ended
|
|||||||
|
September 30,
2010
|
September 30,
2009
|
|||||||
|
Cash
dividends paid to SWM stockholders
|
$ | (8.1 | ) | $ | (6.9 | ) | ||
|
Net
proceeds from (payments on) borrowings
|
(4.9 | ) | (48.8 | ) | ||||
|
Purchases
of treasury stock
|
(19.0 | ) | (0.8 | ) | ||||
|
Proceeds
from exercises of stock options
|
1.6 | 8.9 | ||||||
|
Excess
tax benefits of stock-based awards
|
1.3 | 1.0 | ||||||
|
Cash
Used in Financing
|
$ | (29.1 | ) | $ | (46.6 | ) | ||
27
Financing
activities during the nine months ended September 30, 2010 included borrowings
of $51.0 million and net repayments of debt totaling $55.9 million for a net
repayment of $4.9 million. Cash dividends paid to SWM stockholders were $8.1
million.
Financing
activities during the prior-year period included borrowings of $33.4 million and
net repayments of debt totaling $82.2 million for a net repayment of $48.8
million. Cash dividends paid to SWM stockholders were $6.9 million in
the nine months ended September 30, 2009.
Dividend
Payments
We have
declared and paid quarterly dividends of $0.15 per share since the second
quarter of 1996. On September 23, 2010, the Board of Directors
authorized a quarterly cash dividend of $0.15 per share of common
stock. The dividend will be payable on December 29, 2010, to
stockholders of record on November 29, 2010. We expect to continue this level of
dividend. However, the decision to declare a dividend is made quarter
by quarter and is based upon a number of factors including, but not limited to,
earnings, funding of strategic opportunities and our financial
condition. A decision could be made to cancel, suspend, modify or
change the form of future dividend payments.
Share
Repurchases
We
repurchased 388,694 shares of our common stock during the nine month period
ended September 30, 2010 at a cost of $19.0 million. See Part II, Item 2,
Unregistered Sales of Equity Securities and Use of Proceeds.
Debt
Instruments and Related Covenants
|
($ in millions)
|
Nine Months Ended
|
|||||||
|
September 30,
2010
|
September 30,
2009
|
|||||||
|
Changes
in short-term debt
|
$ | 2.9 | $ | (21.1 | ) | |||
|
Proceeds
from issuances of long-term debt
|
48.1 | 33.4 | ||||||
|
Payments
on long-term debt
|
(55.9 | ) | (61.1 | ) | ||||
|
Net
(payments on) proceeds from borrowings
|
$ | (4.9 | ) | $ | (48.8 | ) | ||
Net
payments on long-term debt were $7.8 million and proceeds from short-term debt
were $2.9 million during the nine months ended September 30, 2010.
Availability
under the U.S. Revolver increased to $95.0 million as of September 30, 2010 from
$62.0 million as of December 31, 2009. Availability under the Euro
Revolver decreased to 55.0 million euros, or $74.9 million, as of September 30,
2010 from 72.0 million euros, or $103.8 million, as of December 31, 2009. We
also had availability under our bank overdraft facilities and lines of credit of
$29.9 million as of September 30, 2010.
The
Credit Agreement contains covenants that are customary for facilities of this
type that, among other things, require the Company to maintain (a) a net debt to
equity ratio not to exceed 1.0 and (b) a net debt to adjusted EBITDA ratio not
to exceed 3.0. As of September 30, 2010, the net debt to equity ratio
was (0.05), and the net debt to adjusted EBITDA ratio was (0.19). We
could have borrowed the remaining contractual availability under the Credit
Agreement as of September 30, 2010 without having exceeded the 3.0 net debt to
adjusted EBITDA ratio. The Company was in compliance with all the
financial covenants of the Credit Agreement as of September 30,
2010.
Our total
debt to capital ratios at September 30, 2010 and December 31, 2009 were 9.2% and
11.1 %, respectively.
Other Factors Affecting
Liquidity and Capital Resources
Postretirement
Benefits. Our pension obligations are funded by our separate
pension trusts, which held $121.4 million in assets at December 31,
2009. The combined postretirement benefit obligation of our U.S. and
French pension plans was underfunded by $27.2 million as of December 31,
2009. We are not required to make contributions to these plans during
2010.
Other Commitments. The French
segment has minimum purchase agreements for wood pulp and other fibers of $27
million and $7 million during 2010, respectively. The U.S. segment
has an agreement to purchase $2 million in tobacco stems in 2010. Papeteries de
Mauduit, or PdM, has a minimum annual commitment for calcium carbonate
purchases, a raw material used in the manufacturing of some paper products,
which totals approximately $2 million per year through 2014. Our
future purchases at PdM are expected to be at levels that exceed such minimum
levels under the contract.
28
LTRI and
PdM are committed to purchasing minimum annual amounts of steam provided by
cogeneration facilities for the next 11 to 13 years. These minimum
annual commitments together total approximately $4 to $5
million. LTRI’s and PdM’s current and expected requirements for steam
are at levels that exceed the minimum levels under the respective
contracts.
Brazil,
or SWM-B, and PdM have separately entered into agreements for the transmission
and distribution of energy. The SWM-B contract for the electrical
energy supply is effective through December 31, 2010 covering 100% of the mill’s
consumption of electrical energy. The value of the electric energy to
be provided under this contract is estimated at approximately $4
million. The PdM natural gas agreement provides for the supply of
100% of its requirements for natural gas and associated distribution to service
its paper mill. The value of the natural gas and distribution to be
provided under this contract is estimated at approximately $11.5 million in
2010.
Employee Labor
Agreements. Hourly employees at the Spotswood, New Jersey and
Ancram, New York mills are represented by locals of the United Steel Workers
Union. The Spotswood mill is operating pursuant to a collective
bargaining agreement effective through July 28, 2011. The collective bargaining
agreement at our Ancram, New York mill is a 3-year agreement effective through
September 30, 2011.
Hourly
employees at our Saint-Girons, Quimperlé, and Spay, France mills are union
represented. The collective bargaining agreements at Quimperlé, Spay
and St. Girons mills are effective through December 31, 2010, February 28, 2011
and June 1, 2011, respectively. The collective bargaining agreement
at our Medan, Indonesia mill expires June 30, 2011.
Hourly
employees at the Pirahy mill in Santanesia, Brazil are represented by a
union. A one-year collective bargaining agreement was recently
renewed through May 31, 2011.
Outlook
We remain
confident in our strategy to grow SWM’s high value products franchise and look
forward to the coming twelve months as we bring to fruition the two principle
elements of this effort: launching LIP cigarette paper in Europe and completion
of our greenfield RTL facility in the Philippines. We remain diligent
in managing with excellence our present day-to-day business while at the same
time implementing these strategic initiatives.
Our third
quarter financial results reflect a relatively stable internal and external
business environment. Year-over-year comparisons continue to be
negatively impacted by increased wood pulp prices and unfavorable foreign
currency exchange impacts. Sales and production volumes decreased
versus the third quarter of 2009 primarily due to decreased sales of RTL as a
result of timing of customer orders. Operationally, performance
across SWM’s production sites improved during the third quarter.
Until EU
LIP demand commences, SWM’s business is expected to be relatively stable at or
near current earnings levels. At present there is a lack of clarity regarding
the exact timing of LIP regulatory enforcement and procurement decisions
regarding LIP cigarette paper supply among the majority of the EU customer base
remain open. Therefore, the level of benefit to SWM’s future earnings
from the advent of EU LIP requirements remains dependent upon actual sales
volume and product pricing that is yet to be determined, but should become
clearer in the coming months.
29
Forward-Looking
Statements
This
report contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that are subject to the safe harbor
created by that Act. These statements include those in the “Outlook”
section and our expectations elsewhere in Management’s Discussion and Analysis
of Financial Condition and Results of Operation, and in “Risk Factors” in Item
1A. They also include statements containing “expect,” “anticipate,”
“project,” “appears,” “should,” “could,” “may,” “typically” and similar
words. Actual results may differ materially from the results
suggested by these statements for a number of reasons, including the
following:
|
|
·
|
Schweitzer-Mauduit
has manufacturing facilities in 7 countries, a joint venture in China, and
sells products in over 90 countries. As a result, it is subject
to a variety of import and export, tax, foreign currency, labor and other
regulations within these countries. Changes in these regulations, or
adverse interpretations or applications, as well as changes in currency
exchange rates, could adversely impact the Company’s business in a variety
of ways, including increasing expenses, decreasing sales, limiting its
ability to repatriate funds and generally limiting its ability to conduct
business. In Brazil, we are currently generating more
value-added tax credits than we utilize. As of September, 30,
2010, these credits totaled $13.9 million. We are undertaking
actions that, if successful, should allow our Brazilian operation to
utilize more credits than it generates on an annual basis. These credits
do not expire; however, if the actions being undertaken are not
successful, we may record an allowance against the current
balance.
|
|
|
·
|
The
Company’s sales are concentrated to a limited number of
customers. In 2009, 56% of its sales were to its four largest
customers. The loss of one or more of these customers, or a
significant reduction in one or more of these customers' purchases,
depending on the product impacted, could have a material adverse effect on
the Company’s results of
operations.
|
|
|
·
|
The
Company’s financial performance is materially impacted by sales of both
reconstituted tobacco products and cigarette paper for lower ignition
propensity cigarettes. A significant change in sales or
production volumes, pricing or manufacturing costs of these products or
the failure to realize expected increases in the sales volumes of these
products could have a material impact on future financial
results.
|
|
|
·
|
As
a result of excess capacity in the tobacco-related papers industry and
increased operating costs, competitive levels of selling prices for
certain of the Company’s products are not sufficient to cover those costs
with a margin that the Company considers reasonable. Such
competitive pressures have resulted in downtime of certain paper machines
and, in some cases, accelerated depreciation or impairment charges for
certain equipment as well as employee severance expenses associated with
downsizing activities. The Company will continue to disclose
any such actions as they are announced to affected employees or otherwise
become certain and will continue to provide updates to any previously
disclosed expectations of expenses associated with such
actions
|
|
|
·
|
In
recent years, governmental entities around the world, particularly in the
United States and western Europe, have taken or have proposed actions that
may have the effect of reducing consumption of tobacco
products. Reports with respect to the possible harmful physical
effects of cigarette smoking and use of tobacco products have been
publicized for many years and, together with actions to restrict or
prohibit advertising and promotion of cigarettes or other tobacco
products, to limit smoking in public places and to increase taxes on such
products, are intended to discourage the consumption of cigarettes and
other such products. Also in recent years, certain governmental
entities, particularly in North America, have enacted, considered or
proposed actions that would require cigarettes to meet specifications
aimed at reducing their likelihood of igniting fires when the cigarettes
are not actively being smoked. Furthermore, it is not possible to predict
what additional legislation or regulations relating to tobacco products
will be enacted, or to what extent, if any, such legislation or
regulations might affect our
business.
|
|
|
·
|
Our
portfolio of granted patents varies by country, which could have an impact
on any competitive advantage provided by patents in individual markets. We
rely on patent, trademark, and other intellectual property laws of the
United States and other countries to protect our intellectual property
rights. In order to maintain the benefits of our patents, we may be
required to enforce certain of our patents against infringement through
court actions. However, we may be unable to prevent third parties from
using our intellectual property or infringing on our patents without our
authorization, which may reduce any competitive advantage we have
developed. If we have to litigate to protect these rights, any proceedings
could be costly, time consuming, could divert management resources, and we
may not prevail. We cannot guarantee that any United States or foreign
patents, issued or pending, will continue to provide us with any
competitive advantage or will not be successfully challenged by third
parties. We do not believe that any of our products infringe the valid
intellectual property rights of third parties. However, we may be unaware
of intellectual property rights of others that may cover some of our
products or services. In that event, we may be subject to significant
claims for damages. Effectively policing our intellectual property and
patents is time consuming and costly, and the steps taken by us may not
prevent infringement of our intellectual property, patents or other
proprietary rights in our products, technology and trademarks,
particularly in foreign countries where in many instances the local laws
or legal systems do not offer the same level of protection as in the
United States.
|
30
Oppositions
were filed in December 2009 with the European Patent Office (EPO) contesting the
grant by the EPO to the company of patent number EP-1482815. The company
believes that the EPO properly granted the patent and has responded to the
opposition arguments by the September 18, 2010 deadline established by the EPO.
However, the final resolution of the oppositions could result in the
invalidation of the patent or a further limitation of the scope of the patent
claims which could affect the competitive value of the patent. The outcome of
this dispute would not prevent the Company from practicing its Alginex® LIP
solution.
Further,
the company filed an infringement action on February 8, 2010 in the United
States District Court for South Carolina, Charleston Division, against multiple
defendants alleging infringement of the company’s United States Patent Number
6,725,867 and a First Amended Complaint on June 1, 2010 which added claims of
alleged infringement under United States Patent Number 5,878,753 and further
specification of the products alleged to violate said
patents. Adversarial proceedings present uncertainties and risks,
which could include invalidation of the patent in dispute, a change in the scope
of the patent claims, or an adverse determination on the question of
infringement, among others. The outcome of this dispute would not prevent the
Company from practicing its Alginex® LIP solution.
|
|
·
|
The
Company faces commitments and contingencies, including the class action
case, the Brazil ICMS case, French employee Claims for additional
severances and environmental matters, as discussed in Note 10, Commitments
and Contingencies, of the unaudited consolidated financial statements
included in Part I, Item 1 of this document. The Company’s
assessment of the likely outcome of each of these matters involves
assumptions and judgments as to future events and outcomes that could turn
out to be other than the Company expected. An unfavorable
outcome in one or more of these matters could have a material impact on
future financial results.
|
For
additional factors and further discussion of these factors, please see our
Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
market risk exposure at September 30, 2010 is consistent with, and not
materially different than, the types of market risk and amount of exposures
presented under the caption “Market Risk” in Part I, Item 1A in our Annual
Report on Form 10-K for the year ended December 31, 2009 filed with the
SEC.
ITEM
4. CONTROLS AND PROCEDURES
We
currently have in place systems relating to disclosure controls and procedures
with respect to the accurate and timely recording, processing, summarizing and
reporting of information required to be disclosed in our periodic Exchange Act
reports. We periodically review and evaluate these disclosure controls and
procedures to ensure that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions about required disclosure. In
completing our review and evaluation of the effectiveness of our disclosure
controls and procedures as of September 30, 2010, our Chief Executive Officer
and Chief Financial Officer have concluded that these controls and procedures
were effective as of September 30, 2010. No changes in our internal control over
financial reporting were identified as having occurred in the fiscal quarter
ended September 30, 2010 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
31
PART
II
ITEM 1. LEGAL PROCEEDINGS
The
Company is involved in various legal proceedings and disputes (see Note 15,
Commitments and Contingencies, of the Notes to the Consolidated Financial
Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009). Except as noted below,
there have been no material developments to these matters during
2010.
Class
Action
On March
31, 2010, the City of Pontiac General Employees’ Retirement System, individually
and on behalf of all others similarly situated, sued Schweitzer-Mauduit
International, Inc., its Chief Executive Officer, Frédéric P. Villoutreix, and
its Chief Financial Officer, Peter J. Thompson, in the United States District
Court for the Northern District of Georgia for alleged violations of certain
sections and rules of the Securities Act of 1934. The plaintiffs’ identified a
putative class period covering August 5, 2009 to February 10,
2010. The primary allegations of the suit contend that the defendants
misrepresented the strength of the Company’s competitive position in the U.S.
and its ability to withstand European competition, particularly in the area of
lower ignition propensity papers. Further, the complaint alleges that the
defendants concealed threats to the Company’s relationship with Phillip Morris
USA, Inc. As a consequence of these alleged misrepresentations or
omissions, the plaintiffs contend that the Company’s stock price was
artificially inflated causing the plaintiffs to be damaged in an unspecified
amount. The court issued an order on August 26, 2010
appointing as co-Lead Plaintiffs the City of Pontiac General Employees'
Retirement System and the Western Washington Laborers-Employers Pension
Trust. Robbins Geller Rudman & Dowd was appointed Lead
Counsel. Plaintiffs filed an Amended Consolidated Complaint, which
becomes the operative complaint in the case going forward. The
Company believes that the allegations are without merit as to all defendants and
intends to vigorously defend the matter as to itself and its two officers. The
Company believes the litigation will not have a material adverse impact on the
Company’s financial condition.
Imposto sobre Circulação de
Mercadorias e Serviços, or ICMS
As
previously disclosed in our filing on Form 10-K for the year ended December 31,
2009, in January 2010, the State of Rio de Janeiro attempted to execute a tax
foreclosure to collect Assessment 2001.001.064544.6. The Company
responded by filing two actions, one in the court of the State of Rio de Janeiro
to stay the tax foreclosure and a second action for a writ of prevention filed
with the Supreme Court of Brazil.
On May
27, 2010, the State of Rio de Janeiro imposed a freeze of SWM-B’s bank
accounts. In June 2010, the Supreme Court of Brazil granted the writ of
prevention and stayed the execution of the tax foreclosure by the State of Rio
de Janeiro. On July 1, 2010, based on the Supreme Court’s order granting
the writ of prevention, the local court in Pirahy removed the freeze imposed on
SWM-B’s bank accounts. Based on the foreign currency exchange rate at
June 30, 2010, the Assessment totaled approximately $32 million, of which
approximately $15 million is covered by indemnification. No liability has been
recorded in our consolidated financial statements for the Assessment based on
our evaluation that SWM-B is more likely than not to prevail in its challenge of
the Assessment under the facts and law as presently understood.
French Employee Claims for
Additional Severances
In
connection with the closure of the Malaucène mill, approximately 150 previously
severed employees have filed claims for additional severances in the respective
labor tribunal, alleging a lack of economic justification for closure of the
mill or that the Company did not follow the precise legal requirements around
identifying and offering other jobs within the SWM worldwide
group. The Company intends to defend these claims vigorously, however
based on a preliminary evaluation of these claims it is probable that we will
incur additional severances in order to resolve this matter. In the
three and nine month periods ended September 30, 2010, the results of
discontinued operations included $1.2 million and $2.8 million, respectively, of
accrued pre-tax expense associated with these claims.
32
ITEM
1A. RISK FACTORS
There
were no material changes in the risk factors previously disclosed in our Form
10-K for the year ended December 31, 2009.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer
Purchases of Equity Securities
The
following table indicates the amount of shares of the Company’s common stock it
has repurchased during 2010 and the remaining amount of share repurchases
currently authorized by our Board of Directors as of September 30,
2010:
|
Period
|
Total
Number of
Shares
Purchased
|
Average
Price
Paid per
Share
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Programs
|
Maximum amount of
shares that May Yet
Be Purchased under
the Programs
|
||||||||||||||||
|
(#
shares)
|
($
in millions)
|
($
in millions)
|
||||||||||||||||||
|
First
Quarter 2010
|
8,491 | $ | 70.35 | 8,491 | $ | 0.6 | ||||||||||||||
|
Second
Quarter 2010
|
3,300 | $ | 48.34 | 3,300 | $ | 0.2 | ||||||||||||||
|
July
2010
|
12,200 | $ | 48.62 | 12,200 | $ | 0.6 | ||||||||||||||
|
August
2010
|
364,703 | $ | 48.39 | 364,703 | $ | 17.6 | ||||||||||||||
|
September
2010
|
— | — | — | — | ||||||||||||||||
|
Total
Year-to-Date 2010
|
388,694 | $ | 48.88 | 388,694 | $ | 19.0 | $ | 11.0 | * | |||||||||||
*In June
2010, our Board of Directors authorized the repurchase of shares of our Common
Stock during the period January 1, 2010 to December 31, 2011 in an amount not to
exceed $30.0 million.
The
Company sometimes uses corporate 10b5-1 plans so that share repurchases can be
made at predetermined stock price levels, without restricting such repurchases
to specific windows of time. Future common stock repurchases will be
dependent upon various factors, including the stock price, strategic
opportunities and cash availability.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
|
(a)
|
Exhibits:
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.*
|
|
|
*
|
These
Section 906 certifications are not being incorporated by reference into
the Form 10-Q filing or otherwise deemed to be filed with the Securities
and Exchange Commission.
|
33
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Schweitzer-Mauduit
International, Inc.
(Registrant)
|
By:
|
/s/ PETER J. THOMPSON
|
By:
|
/s/ MARK A. SPEARS
|
|
|
Peter
J. Thompson
|
Mark
A. Spears
|
|||
|
Executive
Vice President, Finance
|
Corporate
Controller
|
|||
|
&
Strategic Planning
|
(principal
accounting officer)
|
|||
|
(duly
authorized officer and
|
||||
|
principal
financial officer)
|
||||
|
November
3, 2010
|
November
3, 2010
|
34
GLOSSARY
OF TERMS
The
following are definitions of certain terms used in our Form 10-Q and 10-K
filings:
|
|
·
|
“Banded cigarette paper”
is a type of paper, used to produce lower ignition propensity cigarettes,
by applying bands to the paper during the papermaking
process.
|
|
|
·
|
“Binder” is used to hold
the tobacco leaves in a cylindrical shape during the production process of
cigars.
|
|
|
·
|
“Cigarette paper” wraps
the column of tobacco within a cigarette and has varying properties such
as basis weight, porosity, opacity, tensile strength, texture and burn
rate.
|
|
|
·
|
“Commercial and industrial
products” include lightweight printing and writing papers, coated
papers for packaging and labeling applications, business forms, battery
separator paper, drinking straw wrap and other specialized
papers.
|
|
|
·
|
“Flax” is a cellulose
fiber from a flax plant used as a raw material in the production of
certain cigarette papers.
|
|
|
·
|
“Lower ignition propensity
cigarette paper” includes banded and print banded cigarette paper,
both of which contain bands, which increase the likelihood that an
unattended cigarette will
self-extinguish.
|
|
·
|
“Net debt to adjusted EBITDA
ratio” is a financial measurement used in bank covenants where
“Net Debt” is
defined as the current portion of long term debt plus other short term
debt plus long term debt less cash and cash equivalents,
and
|
|
|
·
|
“Adjusted EBITDA” is
defined as net income excluding extraordinary or 1-time items, net income
attributable to noncontrolling interest, interest expense, income taxes
and depreciation and amortization less amortization of deferred
revenue.
|
|
|
·
|
“Net debt to capital
ratio” is current and long term debt less cash and cash
equivalents, divided by the sum of current debt, long term debt,
noncontrolling interest and total stockholders’
equity.
|
|
|
·
|
“Net debt to equity
ratio” is current and long term debt less cash and cash
equivalents, divided by noncontrolling interest and total stockholders’
equity.
|
|
|
·
|
“Net operating working
capital” is accounts receivable, inventory, current income tax
refunds receivable and prepaid expense, less accounts payable, accrued
liabilities and accrued income taxes
payable.
|
|
|
·
|
“Opacity” is a measure
of the extent to which light is allowed to pass through a given
material.
|
|
|
·
|
“Operating profit return on
assets” is operating profit divided by average total
assets.
|
|
·
|
“Plug wrap paper” wraps
the outer layer of a cigarette filter and is used to hold the filter
materials in a cylindrical form.
|
|
|
·
|
“Print banded cigarette
paper” is a type of paper, used to produce lower ignition
propensity cigarettes, with bands added to the paper during a printing
process, subsequent to the papermaking
process.
|
|
|
·
|
“Reconstituted tobacco”
is produced in 2 forms: leaf, or reconstituted tobacco leaf, and wrapper
and binder products. Reconstituted tobacco leaf is blended with virgin
tobacco as a design aid to achieve certain attributes of finished
cigarettes. Wrapper and binder are reconstituted tobacco products used by
manufacturers of cigars.
|
|
|
·
|
“Restructuring and impairment
expense” represents expenses incurred in connection with activities
intended to significantly change the size or nature of the business
operations, including significantly reduced utilization of operating
equipment, exit of a product or market or a significant workforce
reduction and charges to reduce property, plant and equipment to its fair
value.
|
|
|
·
|
“Start-up costs” are
costs incurred prior to generation of income producing activities in the
case of a new plant, or costs incurred in excess of expected ongoing
normal costs in the case of a new or rebuilt machine. Start-up costs can
include excess variable costs such as raw materials, utilities and labor
and unabsorbed fixed costs.
|
|
|
·
|
“Tipping paper” joins
the filter element to the tobacco-filled column of the cigarette and is
both printable and glueable at high
speeds.
|
|
|
·
|
“Wrapper” covers the
outside of cigars providing a uniform, finished
appearance.
|
35
SCHWEITZER-MAUDUIT
INTERNATIONAL, INC.
Quarterly
Report on Form 10-Q
for
the Quarterly Period Ended September 30, 2010
INDEX
TO EXHIBITS
|
Exhibit
|
|||
|
Number
|
Description
|
||
|
31.1
|
—
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
—
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
32
|
—
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.*
|
|
|
*
|
These
Section 906 certifications are not being incorporated by reference into
the Form 10-Q filing or otherwise deemed to be filed with the Securities
and Exchange Commission.
|
36